Carnival Corporation (CCL): Don’t Let Bad Headlines Scare You Away From This Stock

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Investors seem to have cooled on Carnival Corporation (NYSE:CCL) after an improbable series of catastrophic failures on its cruise ships. Although the deadly Costa Concordia incident took the greatest toll on passengers, the company’s multiple breakdowns in the Gulf of Mexico likely caused a greater backlash among potential customers.

Carnival Corporation (NYSE:CCL)

The result of having nothing but bad news come out about the company was a weak first quarter for bookings, the largest booking quarter of the year. As a result, management lowered its guidance for the year and investors lowered the price they are willing to pay for the stock. This presents an opportunity for long-term investors to get in at an attractive price.

Durable franchise

Although bad publicity has had a short-term impact on bookings, it is unlikely that the company’s long-term prospects have been tarnished in any meaningful way. Carnival is simply too dominant to be toppled.

Its closest competitor, Royal Caribbean Cruises Ltd. (NYSE:RCL), is only half the size of Carnival Corporation (NYSE:CCL). The third-largest cruise operator, Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), is less than half the size of Royal Caribbean.

As a result of having superior economies of scale, Carnival earns significantly higher margins than its peers.

Since economies of scale are the most important competitive advantage in the cruise industry, it is unlikely that Royal Caribbean or Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) pose a significant threat to Carnival’s market dominance. If either company starts taking market share, Carnival can simply reduce its prices to a point where the smaller competitor is unable to generate a profit.

Although this would reduce Carnival Corporation (NYSE:CCL)’s earnings, it would be more devastating for the smaller competitor. As a result, Royal Caribbean Cruises Ltd. (NYSE:RCL) and Norwegian only engage in price competition in markets in which they have superior scale. This allows each company to consistently turn a profit.

Investment case

Carnival Corporation (NYSE:CCL)’s weak booking season proves that brand image is a relevant factor in cruise selection, but available routes and cost of journey remain the most important factors for customers. Fortunately for shareholders, Carnival has more than double the cruise ships of its nearest competitors — which affords it greater capacity on popular routes — and the widest base across which it can spread its fixed costs — allowing it to offer competitive prices while earning higher margins than its competitors.

In other words, Carnival Corporation (NYSE:CCL) still earns top marks on the two most important factors in cruise selection, despite the short-term setback that comes as a result of an unprecedented string of bad publicity for the company.

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