Bear of the Day: Carnival (CCL)

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April 01, 2013 |

With discretionary spending surging higher, many investors are looking to consumer plays, such as those in the vacation space, for big gains. However, the entire segment isn’t a buy, as there have been some significant problems with a few big names in the space as of late.

For example, for anyone looking to take a cruise, the name Carnival probably doesn’t inspire too much confidence. The big cruise ship operator has had big problems lately with a few troubled ships in the Caribbean.

The firm saw a generator issue with one of its ships recently, while there was a similar—and more infamous—problem afflicting another ship in the Caribbean before that. These experiences, while isolated, have definitely damaged the company’s brand name, and they have also called into question the 2013 outlook for CCL going forward.

Estimate Trend

In fact, analysts have greatly slashed their estimates for the company, not only in this quarter, but in subsequent periods as well. The magnitude of the revisions have been astounding as well, as the consensus for the current quarter was 30 cents two months ago, and it is now just nine cents a share.

This represents a dramatic decline for the cruise ship operator, as literally ever y estimate (in the Zacks Consensus) that has come out in the past two months has been down. One analyst even looks for the company to lose money this quarter, showcasing just how far expectations have fallen for the firm.

These trends have pushed Carnival to a Zacks Rank of 5 or ‘Strong Sell’, putting the firm in very unfavorable company. If that wasn’t enough, the industry rank comes in the bottom third of all the segments, so there is little help from that perspective either.

Other Factors

Beyond earnings estimates, the company is also facing a number of issues which could make it a poor investment. Margins have been on the decline for the past few years, as the EBT margin was approaching 20% a decade ago, and now it is below 8.5%.

Meanwhile, revenue and income metrics are also sliding compared to their historic levels. Revenue growth was below 10% year-over-year in the latest report—compared to far higher levels years ago—while an even more depressed trend exists for net income as this level is negative when looking at five year averages, suggesting that this company has already been in some choppy waters for quite some time.

Better Play

If investors are dead set on making a play in the broad leisure and recreational services space though, there are a handful of other options. Chief among them, at least from a Zacks Rank perspective, is Speedway Motorsports .

This small cap company owns and operates a number of speedways across the U.S., while it also owns the Performance Racing Network as well, giving it some level of diversification. The firm is currently sporting a Zacks Rank of 1 or ‘Strong Buy’ so it could be better positioned than the sluggish CCL for investor portfolios in the near term.

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