Why There Is Smooth Sailing Ahead for Carnival

Lots of issues have sunk Carnival Corp. (NYSE: CCL) shares this year by 10%, ranging from worries about the Zika virus to actual illness of passengers from the norovirus on the Carnival Sunshine. Many on Wall Street, though, believe there is plenty of smooth sailing ahead for the stock.

First, cruising is a solid, cost-effective product. It’s the best way for vacationers to experience multiple destinations in places like the Caribbean and Europe. Essentially, the ship is like a floating hotel with all-you-can-eat buffets and all the booze you can afford. Carnival, which ferries 47% of cruise ship passengers through its nine brands, should continue to benefit from an improving job market and low oil prices.

The company’s problems also need to be looked at in context.

Norovirus is awful for those that experience it, but keep in mind it’s not the bubonic plague. It’s a bug that doesn’t usually require treatment and affects less than 1% of all cruise ship passengers. Carnival is well-versed in handling these outbreaks when they occur. Of course, on those rare occasions when it becomes a serious issue, the company will cut the cruise short and head back to port. However, that’s the exception rather than the rule.
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As for Zika, Carnival and other cruise ship operators have waived cancellation fees for pregnant women worried about their children being born with abnormally small heads. Operators also are allowing them to book vacations outside the affected areas. Though this trend may hurt Carnival’s bottom line, remember that its rivals are in the same boat.

In recent years, Carnival has survived even worst disasters, such the Costa Concordia accident a few years ago caused by the negligence of a Carnival Captain that left 32 passengers dead. The company has rebounded from that tragedy and will overcome these latest challenges.

Heading into the March 30 earnings report, Carnival’s stock trades at about a 23% discount to analysts’ average 52-week price target. Wall Street’s expectations for the Miami-based company are modest. Sales in the most recent quarter are forecast to rise 2.7% to $3.63 billion. Per-share profit is expected to rise to $0.32. Investors should consider buying Carnival’s stock at current prices before they sail away to higher valuations.