Over the weekend one of Carnival Cruise Lines Italian subsidiary ships struck a reef and sunk off the coast of Italy. The disaster has been classified as human error. As of this morning there are 6 people dead and 29 still missing. The boat sits dangerously on its side with a 160 foot gash in it. To make matters worse there appears to be over 500,000 gallons of heavy shipping fuel on board. If the ship breaks up, or leaks the fuel, you are looking at a serious localized ecological nightmare. All of this is obviously impacting Carnival’s stock.
Carnival (symbol CCL) is indicating an opening decline of 16.7% ($28.55 down from Friday close of $34.28). Today Carnival pays an annual dividend of $1.00. As the charges for the cost of the disaster come in greater focus, expect that dividend to be cut to between $.20 and $.40 annually. Expect the stock to be under increased selling pressure for at least 1 week past the removal of the ship from the reef. You have time to wait to jump into the stock. I would wait until the stock is $18 and below before starting a position.
Expectations:
Wall St will more than likely sell this stock first instead of holding it through the disaster. The stock will probably have a 2 to 3 month period where the price is heading lower. Then you can expect a quick 10% rise. After that the stock will do nothing for 6 to 12 months.
The way I plan on playing this one is to open a position below $18 over a period of weeks. I will slowly add to that position until it is 10% of my portfolio. Once I have the position in place I will plan on holding it 36 to 48 months for a price near $45 per share. I anticipate a return of 150% over 4 years, or 37.5% annually plus dividends.
This stock is purely speculative. I would advise to only play this with money you can lose. This situation is what is classified as a “special situation stock”. That means a large company changing event has happened and that you are speculating that the company can make it through the rough period. Sometime they do and sometimes they do not. Previous special situations were like Apple computer when Steve Jobs rejoined, or McDonald’s when they reported their first quarterly loss, Starbucks when they shut a number of locations because of over expansion, or BP during the gulf oil spill. All these situations rewarded investors that took a risk when things looked their bleakest. There are also stocks like Enron and GM where investors lost everything.
I think Carnival has the makings to be one of the winners. They currently have over 50% market share in the cruise market. The disaster hit in a foreign area that most of their largest demographic, US citizens, will quickly forget about. Think of it this way. If you are freezing your butt off in Buffalo in the middle of winter do you really care that some captain made a mistake in Italy causing the ship to sink? You are just going to book the best deal in the Caribbean that you can find. With over 50% market share in the Caribbean that means you will more than likely book Carnival.
Time will heal these wounds. Carnival is looking at some serious law suits in the coming year. A chunk of that will be paid for by their insurance companies, but there will be a hit to their earnings to cover their portion. They ultimately will be responsible because it is clear that the captain made a navigation mistake and the evacuation drills were not performed. That means there will be a large settlement to the passengers and crew members at some point. The class action lawyers know it is better to keep the company alive so that they can collect rather than kill it off and get less money.
Full Disclosure:
I currently do not own or control any CCL stock. As stated previously I plan to purchase between 500 and 1000 shares once the stock trades below $18 per share.
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