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Carnival Is Charting a Turnaround Course

Thursday - 7/4/2013, 2:10pm  ET

Carnival  has received much publicity during the past few years. Unfortunately, almost none of this publicity has been good publicity, and the company is now in serious damage control mode. After reporting second quarter results that came in far below expectations, as the company heavily discounted the price of its tickets in order to get customers through the door, the company has embarked on a turnaround plan. First off is the removal of chairman and CEO Micky Arison from the CEO role. He is to be replaced by board member Arnold Donald - who has no operational experience in the cruise industry.

Carnival Cruise Lines is split into several brands and the one that needs the most attention is Carnival Corp. famed for several high profile, highly preventable disasters last year. Consultants believe that the turnaround will take two or three years, depending of course on whether or not things actually go to plan.

The whole Carnival group has 100 ships, carries 10 million customers per year and is spending $700 million upgrading its vessels. However, the company has stated that advance bookings and prices for the rest of 2013 will be lower than last year. In addition, the group forecasts that fuel costs will be 3% to 5% higher this year and revenue per berth will be down 2% to 3% for the full year. Overall, diluted earnings per share will be in the range of $1.45 to $1.65, lower than the $1.88 reported in 2012.

Overall, analysts are viewing the turnaround plan with wait-and-see approach, as much depends on the company's ability not to screw up. Having said that, it would appear as if the company has begun to learn from its mistakes and is focusing on improving relations with travel agents and restructuring discount offers. Moreover, the company’s most recent accident, which involved yet another power failure on board one of its ships, was handled in a all-round faster, cleaner and more effective way than its previous disaster, the well publicized fire on board a liner in the Gulf of Mexico that led to a PR nightmare.

Customer satisfaction

It seems as if Carnival will have more on its plate that just renovations and cost cutting. According to a report by J.D. Power and Associates on cruise line customer satisfaction, Carnival does not not rank well. Disney Cruise Line ranks the highest with a customer satisfaction score of 871 out of a possible 1000. Royal Caribbean Cruises  ranks second with a score of 838, and Holland America, which is part of the Carnival Cruise Lines holding company, ranks third, scoring 835.

Would investors do better elsewhere?

It could be prudent for investors to look elsewhere while Carnival recovers. Both Royal Caribbean and Norwegian Cruise Line Holdings  are set to boom over the next few years. Indeed, Royal Caribbean has a higher customer satisfaction rating that Carnival and Norwegian has already staged an impressive turnaround since 2008.

Indeed, Norwegian went public in January of this year and since then the share price has gained 12% compared to Carnival's dismal performance of -11% and Royal Caribbean's 7% drop. Moreover, Norwegian has expanded EBITDA for 19 quarters in a row and has consistently improved customer satisfaction for the last 40 months. The company is taking delivery of new ships this year so the future looks bright. Analysts expect Norwegians income to expand 16% this year and 130% in 2014.

On the other hand…

The future does not look so bright for Royal Caribbean. Earnings estimates have been consistently revised downwards this year as the company faces stiff competition. Earnings were hit by one-off charges last year, falling 97% but are due to recover this year; although, they are still set to come in lower than 2011 when the company earned $2.77 per share. Earnings for this year are expected to touch $2.40 per share. Having said that, Royal Caribbean appears to be the cheapest in the sector, trading at a forward P/E of 11, whereas Carnival trades at 15 and Norwegian trades at round 30.

Foolish summary

All in all, as the biggest cruise company in the world, Carnival should be able to recover well but it will take awhile. On the other hand, both Norwegian and Royal Caribbean present a better thesis for investment. Royal Caribbean is the cheapest in the sector, while Norwegian is achieving the fastest rate of growth.

So, it would appear that whatever type of investor you are, the cruise sector presents an opportunity.

This article was originally published as Carnival Is Charting a Turnaround Courseon

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