No. of Recommendations: 7
I thought I'd take a stab at looking at a small segment of Carnival's finances, particularly its profitability. To do so, I looked at three margin metrics: gross, operating and net. I also examined the margins of its closest rivals for which there are financial statements available, Royal Caribbean (RCL) and Royal Olympic (ROCLF).

Sales

Sales are an important component of margin analysis and their growth is more so from an investment standpoint. The vast bulk of Carnival's revenues come from ticket sales of cruises. Lesser amounts come from transportation (e.g., airline travel to a port) and miscellaneous sources (such as drink sales on board). While CCL has enjoyed 12% average annual growth over the past 8 years, it stumbled last year with revenues actually falling 3.7%, undoubtedly due to residual effects of 9-11. Royal Caribbean, though was able to capitalize on CCL's fumble, growing revenues 9% last year and it has grown revenues on average of 15% per year. Royal Olympic has only averaged 2.5% over the past 6 years, and lost about 1% last year.

Year CCL % Chg RCL % Chg ROCLF % Chg
FY02 $4,368.3 -3.69% $3,434.3 9.19% $127.7 -0.85%
FY01 $4,535.8 20.04% $3,145.3 9.75% $128.8 0.47%
FY00 $3,778.5 8.03% $2,865.8 12.55% $128.2 30.55%
FY99 $3,497.5 16.22% $2,546.2 -3.42% $ 98.2 -21.94%
FY98 $3,009.3 22.95% $2,636.3 35.96% $125.8 4.31%
FY97 $2,447.5 10.62% $1,939.0 42.86% $120.6 *
FY96 $2,212.6 10.73% $1,357.3 14.64%
FY95 $1,998.2 10.64% $1,184.0 1.08%
FY94 $1,806.0 * $1,171.4 *

That CCL felt the effects of 9-11 longer and harder than its competitors is evident when we look at the quarterly numbers. Carnival is strongly marching forward, posting ever stronger numbers with each passing quarter. RCL, on the other hand, has continued to post rather consistent sales figures while ROCLF is hard to determine since they don't always file SEC documentation. I leave them out of this calculation, and as becomes apparent later, they are teetering on the brink of survival anyway. They could be the next candidate for a takeover.

Carnival
Quarters	2000	 2001	  2002	 2003	 2004
FEB * 22.15% -10.03% 13.74% 83.30%e
MAY * 23.31% - 7.62% 35.06% 55.23%e
AUG * 21.31% - 3.31% 75.19%
NOV * 12.79% 6.79% 77.40%

Royal Caribbean
Quarters	2000	 2001	  2002	 2003	 2004
MAR * 2.70% 10.05% 10.03% 15.89%e
JUN * 20.70% 0.02% 10.23%
SEP * 12.63% 9.67% 8.58%
DEC * 2.16% 19.05% 11.18%e

Margin Analysis

Gross Margins

If we move on to looking at the margins posted by the competitors, we see that CCL has been able to retain its dominant position in the cruise industry, despite a bad year, because it has gross margins that are 22% greater than its nearest competitor (47% vs. 38%) and have remained in the high 40's for years. They approach near-Rule Maker status.

Year CCL RCL ROCLF
FY02 47.08% 38.47% 20.83%
FY01 45.57% 38.50% 27.48%
FY00 45.53% 42.34% 36.43%
FY99 46.74% 41.23% 20.98%
FY98 46.19% 39.55% 27.58%

Moreover, CCL's operating margins run nearly 50% higher than RCL's. Comparing them to sales over the past 5 years, we immediately see that Carnival has held a commanding leading, even as Royal Caribbean tried chipping away at that lead. Royal Olympic, on the other hand, simply cannot compete against its much larger rivals.

Operating Margins

In 1998, Carnival was the sales leader and was posting operating margins of almost 30% while Royal Caribbean recorded 18% operating margins. Royal Olympic meekly reported 2.5% margins. As the new millennium approached, however, RCL chipped away at CCL's dominance, chugged ahead with operating margins near 20% just as Carnival fell to 26%. Even anemic Royal Olympic posted strong gains with operating margins hitting 7.5%.

CCL was still the sales leader in 2001, but the terrorist attacks hit the cruise industry hard. So while Royal Caribbean's margins dipped to 14%, CCL's fell further, to 19%. ROCLF couldn't maintain its improvements and its margins fell into the red by 3%. In 2002, despite Carnival losing sales as Royal Caribbean gained them, the power of its market leader position (and its gross margins) enabled CCL to regain market share, perhaps through discounts. CCL's operating margins increased to almost 24% while RCL saw its margins increase modestly to 16%. ROCLF was falling off the cliff with operating margins declining to -12%.

One of the main reasons Carnival was able to maintain its position is that it was simply more profitable. With a variety of brands available and the power to offer discounts in the face of a declining market, Carnival used its muscle to climb back to a strong leadership position.

FY02 Sales OM
CCL $4,368.3 23.86%
RCL $3,434.3 16.04%
ROCLF $ 127.7 -12.45%

FY01
CCL $4,535.8 19.66%
RCL $3,145.3 14.49%
ROCLF $ 128.8 -3.11%

FY00
CCL $3,778.5 26.02%
RCL $2,865.8 19.87%
ROCLF $ 128.2 7.57%

FY99
CCL $3,497.5 29.16%
RCL $2,546.2 18.86%
ROCLF $ 98.2 -12.63%

FY98
CCL $3,009.3 29.79%
RCL $2,636.3 18.54%
ROCLF $ 125.8 2.54%

Net Profit Margins

This market dominance is also apparent when you look at net profit margins. Carnival's run more than twice that of Royal Caribbean's (23% v. 10%). With negative margins of 21%, Royal Olympic may be hearing a death knell soon.

Year CCL RCL ROCLF
FY02 23.26% 10.23% -20.99%
FY01 20.42% 8.09% -18.94%
FY00 25.55% 15.54% 1.25%
FY99 29.37% 15.08% -11.00%
FY98 27.78% 12.55% 3.58%

Carnival, because it is the market leader, is priced accordingly. It has a price-sales ratio of 3.8 and a price-earnings ratio of 16.4. Industry ratios run 3.1 and 36.3, respectively. But interestingly, Royal Caribbean sports a P/S ratio of 0.94 and a P/E of 10.7. With it's steadily increasing earnings estimates and its workman-like ability to turn out consistent margins, RCL could be an investment sleeper itself.

I'd be interested in hearing if anyone divines something different from the foregoing.

Rich
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