Wells Fargo sticks with CCL as a 'buy' purely on valuation

Shares fell sharply last week when the company reported lower yields in Continental Europe and Asia, offsetting North American market strength.

'For the patient investor'

'Admittedly investors will likely justifiably keep CCL shares in the penalty box, as multiple executional and structural issues take time to correct,' Wells Fargo analyst Tim Conder said in a note.

But he's sticking by Carnival, citing its forward price to earnings multiple of 9.4, EV/EBITDA multiple of 7.9 and EV/berth of $180,000 (below the approximately $195,000 to $200,000 per berth replacement cost) — all below the low end of respective average historical ranges, along with a 4.3% yield.

Ongoing Costa challenges

Conder noted Carnival Corp. sources about 30% of its business in Europe, considerably greater than the approximately 10%-15% for Royal Caribbean and the 5%-10% for Norwegian Cruise Line Holdings. 'CCL’s AIDA and Costa nationalistic focused brands limit European itinerary sourcing flexibility from the US. Specifically, Costa continues to face ongoing competitive challenges,' Conder said.

Meanwhile, in the premium Alaska market, competitors are seeing positive 2019 pricing versus Carnival Corp.'s pricing weakness. The Caribbean market continues strong, but will bear close monitoring, Conder said, for potential pricing pressures as Cuba capacity is reallocated.

'Positively, it appears China management changes over the last two years are starting to hone and accelerate organic distribution progress,' he added.

Reduced estimates, price target

Wells Fargo lowered its earnings per share estimates for CCL to $4.39 from $4.59 in 2019 and to $4.67 from $5.03 in 2020. The price target went to $59 from $67.

52-week low

CCL opened at $45.47 on Tuesday and hit a new 52-week low of $45 in morning trading.