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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Carnival

July 25th 2019

Carnival
NYSE Symbol: CCL
Industry: leisure travel
Price as of 7/23: $46.21

 

  After a negative year in 2018, the markets have roared back in the first half of 2019 with the major averages up 19% year to date. Tech stocks and growth stocks have performing very well, but value stocks and many high dividend paying stocks have been left behind. At the end of June, an equity analysis at J.P. Morgan wrote to clients that, value was currently trading at the biggest discount ever with good risk reward going forward. Even with the major averages at all time highs, numerous stocks in the S&P 500 provide dividend yields of greater than 4%. This week we'll highlight one such stock in the leisure travel space. The featured stock is Carnival. Like most value stocks, Carnival has seen better days. The company reported earnings back in June when they lowered third quarter and full year guidance. The company blamed, among other things, their European division which continues to struggle. Geopolitical and macroeconomic headwinds are also causing many to delay travel plans in certain parts of the world and the Trump administration's decision to ban travel to Cuba once again hasn't helped.  With the stock now trading at a four-year low, the valuation looks compelling. The dividend yield of 4.4% is attractive, a recent positive article in Barron's lends support and insider buying from the CEO suggests that the stock is attractively priced with hopefully good risk-reward going forward.

For the last month, Carnival's stock has been consolidating around the $45 a share level which was support back in 2016 and 2015. At the start of the month, Barron's wrote a positive article on Carnival expecting smoother sailing for the cruise-liner that boasts over 100 ships and controls nearly 50% of the market share. The biggest drag on earnings is coming from Europe which accounts for 30% of their business, more than double any rival. The debt level is high at $11 billion and the company is spending on new cruise ships which can cost as much as a billion dollars, but the outlook for Carnival and the industry remains bright. Travel remains one of the world's largest growth industries, growing 4% annually. This has been the bull case for Boeing the last several years thanks to a growing middle class around the world that wants to do what American middle-class citizens do, travel and see the world.

The Barron's article also suggested that recent valuations may attract activist investors, including individuals like Warren Buffett and Berkshire Hathaway who have the money and resources to buy the whole company. At currently levels the stock provides attractive valuation trading for 10 times earnings, 1.6 times sales, 1.3 times book value of $35 a share and sports a great dividend yield of 4.4%. The analyst over at Wells Fargo has made comments that the stock is too cheap and has a price target of $59 a share or 30% above current levels. The analyst over at SunTrust has an even higher price target of $65 a share. With the stock trading at multi-year lows, you'd like to see management take advantage of the recent pull back with insider buying or a share buyback plan. At the end of June, the CEO bought 22,000 shares or a million dollars. Insider buying is a great indicator of valuation by insiders who should know when their own stock is cheap. If the CEO and the Barron's article are any indication, Carnival's stock could perform well going forward.