Carnival Corporation (CCL): Time to Buy?

Valuation

As a result of Carnival’s superior operating efficiencies, the company earns a higher and steadier return on equity than its peers.

However, the story is more impressive when you dig deeper into ROE. While Royal Caribbean’s ROE is only about 20% less than Carnival’s, its return on assets is about half that of its larger competitor. Meanwhile, Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) has struggled to maintain profitability, although it has shown signs of improvement over the last five years.

The only way Royal Caribbean can make up for its lower ROA is by levering up; both Royal Caribbean and NCLH maintain much higher debt levels than Carnival, which amplifies the upside and the downside.

It is troubling that NCLH — the least reliable of the three — has the highest debt level. In reality, Carnival Corporation (NYSE:CCL) has the best ability to maintain a large debt balance, yet it continues to hold a low level of debt by cruise industry standards. This makes it much safer for long-term investors.

As a result of the other two companies’ inferior competitive position and heavy debt loads, long-term investors seeking safety of principal and adequate return should only consider Carnival as a potential investment.

Over the last eight years, Carnival averaged a 10.3% return on equity. Investors who buy the company at book value will likely get a 10% annualized return over the course of their holding. The stock currently trades at 1.13x book. Divide 10.3% by 1.13 to get an estimated normal earnings yield of 9%.

If you can settle for a 9% annualized return over the course of a long-term holding period, then Carnival may be a good investment for you.

The article An Opportune Time to Buy the World’s Biggest Cruise Operator originally appeared on Fool.com is written by Ted Cooper.

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