Of the handfull of analysts who follow the cruise industry actively, most, if not all, seem to be bullish on Carnival Cruise Lines with 12 to 24-month price targets ranging from $45 to $55 per share, compared to $34 7/8 at press time. The 52- week price range is $39 to $24.

Earnings forecasts per share are from $2.25 to $2.30 for 1993; from $2.69 to $2.80 for 1994; and $3.25 for 1995, compared to $2.00 for Carnival's fiscal 1992.

According to analysts interviewed by CIN, investors are buying based on 1994 and 1995 projections. Most noted that the short term outlook was "not great."

Howard Frank, Senior Vice President of Finance for Carnival, said that he expected pricing to be tough during 1993, but that he saw an opportunity for some price improvement in the second half of 1993. He attributed the pressure on pricing partially to the fact that there is still more new capacity to be absorbed.

Frank said that Carnival's Super Savers fare program was proving successful with passengers booking farther out getting the best price. Most of the major cruise lines have implemented similar programs (following Royal Caribbean Cruise Line's Breakthrough program).

Frank also said that he expected a continued expansion of the cruise market in North America at an annual rate between "seven, eight or nine" percent through the decade.

When asked to comment on analysts' statements that there eventually will be three major operators in the North American market, Carnival, RCCL, and Princess Cruises, Frank answered that he saw four major operators. He said the fourth could be either Kloster Cruise or the new Chandris/OSG group.

Favorable Supply/Demand Scenario

At the Robinson-Humphrey Company, James Parker attributed his positive outlook for the 1993-94 period to the projected continuing growth in cruise demand and a deceleration in industry capacity growth.

Parker also said that Carnival's capacity expansion schedule places it in a highly advantageous position to benefit from the industry's improving supply/demand outlook.

According to Parker, Carnival's revenue during the fiscal 1993-95 period is forecast to grow at a compounded annual rate of 16 percent. In addition to capacity expansion, revenue growth is expected to be enhanced by a more premium priced mlx of berths, higher load factors and price increases of approximately two to three percent per year.

Parker predicted earnings to grow at a faster pace of 18 percent on a compunded annual basis.


Among the firms that have changed from a cautious position on Carnival to offering an enthusiastic "buy'' recommendation is Raymond James & Associates. Analyst Janice Farmer attributed the change to the economic recovery, a gradual slow-down in the number of new ships entering the market, and Carnival's newbuilding plans which will give the line increased market share and continuing economies of scale in its operations.

Shearson Lehman Brothers has upgraded its rating of Carnival from a "neutral" to a "buy" recommendation. In a report issued earlier this month, the firm expects revenue to be driven solely by capacity in 1993, however, and that the industry cannot expect to return to pricing flexibility until 1994, at the earliest.

The report also stated that "to stay competitive, cruise companies will need to concentrate on filling new capacity by increasing promotions and continuing to discount." Mergers and acquisitions will continue and eventually Carnival, RCCL, and Princess will dominate in every market, according to Shearson Lehman Brothers.

Keys to Success

According to Shearson Lehman Brothers, Carnival's success can be attributed to its low cost, low price strategy and its continuing building program.

In addition, the report singled out some other rarely-mentioned cost factors. It stated that Carnival saves on port fees by spending up to one half of each cruise at sea. While steaming requires more fuel than days in port, fuel costs are offset by savings on port fees and increases in on board revenues, according to the report.

The Shearson Lehman Brothers' report also stated that Carnival saves food costs through lower cost food items and large purchasing power. Labor costs are also kept at a minimum with only 20 or so officers on each ship being unionized. Other employees were said to be from the Caribbean and Latin America, and that a large portion was compensated almost exclusively by tips.

These cost factors are not unique to Carnival, however, although they are rarely mentioned.

Among other cruise lines, analysts expressed little interest except for RCCL. Some also expressed frustration at extracting information from the financial reports of conglomerate companies.


Rod McLeod, Executive Vice President at RCCL said that he "was not a great believer in instant' recovery." There will be no magical turn-around date, he said.

"As an industry we are still going to face some challenges in 1993. There will still be new capacity albeit at a slower rate than the last couple of years, but we still have a fair amount of capacity that continues to be absorbed," McLeod said. He cautioned that yields will still be under pressure.

David Bernstein, Assistant Treasurer, said that he believed the industry will continue to see a six percent weighted average capacity increase a year over the next four years, compared to an eight percent compounded average over the last 10 years.

Bernstein said that industry dynamics were improving but that it was difficult to determine the rate of the recovery. He also noted that a supply/demand scenario was also very much affected by the general economic situation.

As for an expected IPO, Bernstein said RCCL was still contemplating an offering and that "it looks very interesting."

Other sources close to the company said preparations for an IPO were underway.

A Function of the Market

Bernstein also presented a much different picture from some of the analysts who see 1997 as magic year with capacity reduction based on older ships being withdrawn when unable to meet new fire safety regulations.

Bernstein said that he was not counting cruise lines withdrawing ships in 1997. "Any withdrawals will be more a function of the market at the time, he said, "rather than rules and regulations. If the market is great, people will retrofit ships and continue to operate," Bernstein said.

Parker agreed saying that it was not certain there would be any capacity reduction in 1997.

Parker also noted that ship values, which some cruise lines use to boost the evaluation of their companies, are also a function of market forces and dependent on finding buyers. He also said that ship values might appreciate on equipment that is not made obsolete by the new rules.

Increased Prices, Bigger Discounts

Salomon Brothers' latest report on Carnival noted that the company has embarked on an aggressive discounting program - "with a twist." Published cruise rates rose by nine percent for 1993 and that as a result yields are unlikely to be affected, according to Analyst Margo Vignola. She wrote that with a strengthening economy, yields actually could in crease during the year. However, she based her increased earnings projection mainly on new capacity.

Frank said that Carnival's success can also be attributed to the company's consistent organization and management; consistent marketing; and by focusing promotion on the ships as destinations more than the ports of call. These factors seem to apply equally well to RCCL.