Carnival Cruises Stocks Plummet. What do you Expect !


Now Carnival Cruise Lines the Parent Company for Costa Cruises will suffer. Images of the Costa Concordia sinking off the Italian coast with the loss of at least six lives are unlikely to fade quickly from the public mind. For investors, the 16% stock-price drop Monday in London in the cruise ship's parent company, Carnival—the world's largest cruise operator by sales, with a dual U.K. and U.S. listing—is a grim reminder that there are perils at sea.

Carnival estimates lost earnings from Concordia, one of its 101 ships and about 1.5% of total fleet capacity will cost it up to $95 million this year. Insurance deductibles from ship damage and personal injury claims could add a further $40 million, while the company anticipates other costs "not possible to determine at this time." Morgan Stanley downgraded 2012 earnings expectations 30% on Monday, as a result of lower expected sales in the current peak cruise-booking season.

That may be too pessimistic. Repeat cruisers make up 65% of Carnival's customers, and the industry's previous safety record is strong, with fewer than 0.1 fatalities per million passengers, three times better than that of airlines. U.S. sales rose 9% in the last quarter and those in Europe and Australasia 17%, while new capacity growth is near record lows. Carnival's shares now trade at a lowly 11 times forward earnings, thanks to high fuel costs, the impact of the euro-zone crisis and weak growth, compared with a historic average of 15 times.

Still, it is difficult to gauge the damage to Carnival's brand, how many customers may avoid cruises and potential legal costs until the cause of the disaster is known. Carnival's Italian subsidiary says preliminary indications suggest error on behalf of the captain. But the maritime professionals' union is worried about the recent increase in passenger ship size and wants an industry safety review. Ships like the Concordia, with more than 4,000 people on board, have helped Carnival secure leisure-industry-leading operating margins in excess of 20%. Tighter regulation could be costly.

In a worst-case scenario combining lower sales, higher fuel costs and historic valuation troughs of eight times earnings, Carnival's shares could fall a further 46%, notes Morgan Stanley. Investors may want to wait until there is more clarity on the impact of Saturday's events before considering the shares.