Competition Keeps Carnival a Hold

Although Carnival Corporation’s (CCL - Analyst Report) top-line has remained relatively resilient during the current economic slowdown, substantial increases in expenses have prevented the company from generating higher earnings. We expect margin expansion to be held in check by the inflationary pressures from higher expenses, including employee-related and food costs.

Further, we believe demand for the company’s Caribbean sailings has been negatively impacted by the recent introduction of a new ship by the company’s largest competitor, Royal Caribbean Cruises Ltd. (RCL - Analyst Report). Given the significant impact of fluctuating fuel expenses on the company’s bottom line, we continue to believe that the implementation of a hedging program would be viewed favorably by the Street. The added visibility resulting from a hedging program would enable investors to focus more on operating metrics under the company’s control.

Carnival has historically traded at a premium to Royal Caribbean, based on forward price to earnings multiples. We expect Carnival to continue trading at a premium to Royal Caribbean over the near-term.

However, given our expectation for continuing margin pressures, we maintain our Hold rating on the stock. Our six-month target price of $36 is based on a multiple of 13.5x expected 2008 earnings.

Read the full analyst report on CCL