It is almost a year since the cruise liner Costa Concordia capsized just off Italy. Carnival, its owner, is still feeling the consequences of that tragedy and a fire on another Costa ship shortly afterward. The company – which controls half of the global cruise market – was able to limit the fall in revenue to 3 per cent over the year, but operating profits were 27 per cent down as margins collapsed.
Nevertheless, Carnival's shares are up 15 per cent since the start of January, and now trade on 16 times forecast earnings for 2013. The investment case assumes that it can pull off a dual recovery: in the short term from the Concordia disaster, and in the medium term from a general malaise.
Even before this year, Carnival had been going in the wrong direction for a while. Operating profits in 2011 were more than a 10th lower than they had been five years earlier, despite a big jump in revenues over the period. The global financial crisis did not help, nor did the industry's enthusiasm for new ships. Capacity rose 7 per cent annually between 2000 and 2010. Deutsche Bank expects that rate to halve between now and 2016, allowing the likes of Carnival to improve pricing and margins.
But the company also has to battle grim economic conditions and its cautious tone about 2013 knocked 6 per cent off the shares on Thursday. Earnings for the year could be 7 per cent below previous expectations, with the company pointing the finger at lower pricing. Margins will improve in 2013, but perhaps not as much as the optimists hope.
Some investors will like Carnival's promise to return its $1.3-billion (U.S.) of expected 2013 free cash flow to shareholders, after dividends of a similar amount in 2012. But its profile – a faltering recovery and hefty cash returns – suggests that 16 times earnings is generous.