Should We Cruise on Carnival Corporation (CCL)? – Royal Caribbean Cruises (RCL), Norwegian Cruise Line Holdings Ltd (NCLH)

Carnival Corporation (NYSE:CCL) dropped nearly 2% on March 15 due to its disappointing 2013 outlook. The company expects to earn around $1.80 to $2.10 per share for the year, while analysts expected EPS to be around $2.35. Since the beginning of February, the stock has declined by around 12%, from around $39 per share to nearly $35 per share. Should we avoid Carnival due to its poor outlook? Let’s find out.

Carnival Corporation (NYSE:CCL)

Fluctuating bottom line and free cash flow

Carnival Corporation (NYSE:CCL), incorporated in 1972 in Panama, is considered to be the biggest cruise company globally, with around 100 cruise ships and a portfolio of many world famous cruise brands. The majority of its cruise, around 33% of the total passenger capacity deployed, were in the Caribbean. The European region ranked second, accounting for 31% of the total passenger capacity in 2013.

In the past ten years, Carnival’s revenue has been on the rise, from $6.7 billion in 2003 to $15.4 billion in 2012. However, net income has fluctuated in the range of $1.19 billion – $2.4 billion during the same period. In 2003, it earned $1.66 per share, while the EPS was only $1.67 in 2012. Indeed, over the years, Carnival’s net margin has experienced a decline, from 17.77% in 2003 to only 8.44% in 2012.

In 2012, Carnival generated around $3 billion in operating cash flow and $667 million in free cash flow. What I like about Carnival is that the company does not employ a lot of debt in its operation. As of February 2013, it had $23.5 billion in total stockholders’ equity, $476 million in cash, and nearly $9.4 billion in short and long-term debt.

A decent first quarter

In the first quarter of 2013, Carnival Corporation (NYSE:CCL) reported that its GAAP net income was $37 million, or $0.05 per share. This included the net unrealized losses of $28 million on fuel derivatives. This quarter was an improvement compared to the loss of $139 million in the first quarter last year. A $139 million loss last year was due to a $173 million impairment charge on Ibero goodwill and trademark.

For the full year 2013, Carnival’s Chairman and CEO, Micky Arison, expected that its full year 2013 non-GAAP diluted EPS to be in the range of $1.80 – $2.10, compared to $1.88 per share in 2012. In addition, he estimated that Carnival would generate more than $3 billion in operating cash, and be committed to returning free cash flow to shareholders in 2013.

Highest dividend yield with reasonable valuation

At around $34 per share, Carnival Corporation (NYSE:CCL) is worth around $26 billion on the market. The market values Carnival at around 10.5 times EV/EBITDA. Compared to its peers, including Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), Carnival seems to be the best pick among the three.