December 14, 2000
Forget cruise line gift certificates this year: the hot hot hot gift for your favorite cruiser this holiday season is...a couple of shares of stock. Need guidance? Jill Krutick, an analyst at Salomon Smith Barney who monitors publicly owned cruise lines (among other leisure-oriented industries) is bullish on Carnival. According to a Q&A in today’s Transcript (http://www.twst.com), an online web site featuring investment news, Krutick explains her preference for a Carnival stock pick over Royal Caribbean.
“Carnival is the dominant player in the cruise industry, trading at an attractive valuation, further supported by an EVA analysis that we recently completed on the cruise industry. Carnival has a track record of better navigating through choppy waters. Carnival also has much less operating leverage than Royal Caribbean, making it significantly more attractive in the current environment. Carnival also has the benefit of being able to fund all of its new ship expansion from internally generated funds.”
“In contrast,” she says, “ Royal Caribbean is a play on a very bullish industry backdrop for the cruise industry. Royal Caribbean has an aggressive capacity expansion program under way. Each new ship adds substantially to its earnings potential. However, Royal Caribbean does have a more levered balance sheet, which may only worsen as the company adds more debt to fulfill its expansion plans. As a result, we think that in a negative yield environment, like the industry is now facing, Royal Caribbean is more vulnerable. So I would characterize Royal Caribbean as a great play if the industry outlook brightens dramatically next season, though this is not quite what we’re anticipating. We expect a modest improvement in the outlook for the cruise industry in 2001. As a result, we emphasize Carnival.”
Oddly there was no mention of Princess Cruises, the industry’s number three competitor, but Peter Ratcliffe, the CEO of P&O Princess Cruises Plc, is quoted elsewhere on the site making a pitch for his company -- and explaining why the industry will continue to be dominated by three or four major players.
“To be successful in the industry you need to have ships that cost $400 million each. You need a number of those ships. You have to have a dominant national nationwide brand and so it is an industry that rewards scale. So I think what you are increasingly seeing are those three companies increasingly dominating the United States markets.”
Adds Radcliffe, who notes that his company is strongly emphasizing growth abroad, particularly in Germany and the United Kingdom, “the same criteria will apply on an international basis because you still need the same advantages of scale, market presence, reservation systems, and expertise on building ships. What I think you will see is that the three major players in the US will become the three major players in the global markets. And that, I think, for anybody investing in the cruise industry, is quite exciting because it is a very structured industry in that it is difficult to come in as a new entrant.”