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Experienced Investor

Stock of the week: Carnival

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
03/05/2016

Ian Forrest, investment research analyst at The Share Centre, picks Carnival, the largest cruise company in the world, as a ‘buy’ for medium risk investors.

It has been a historic week for Carnival as on Sunday, one of its cruise ships was the first to sail from the United States to Cuba in more than 50 years. This agreement could have the potential of improving relations between the US and Cuba, as well as lead to a lifting of the long-running trade embargo and boost demand for cruises in the Caribbean.

This momentous move follows a recent dip in the share price and, as a result, investors should acknowledge that we are upgrading our recommendation to a ‘buy’ due to the relative good value represented by the current price.

The company, whose fleet includes a total of 100 ships and 212,000 berths, reported a trading update in March in which it stated that it had made a strong start to 2016, with net income almost doubling in the first quarter. Investors should also note that earnings are expected to grow by 70% over the next three years, which is very fast for a company of Carnival’s size. Furthermore, the dividend yield of 2.7% is better than average for the sector and such payments are expected to grow by 25% over the next couple of years.

Due to the good value represented by the current price, the strong earnings growth boosted by lower fuel costs and the potential growth prospects, we recommend Carnival as a ‘buy’ for medium risk investors with a balanced portfolio. The shares are trading on a 2017 PE of 12.7, which is lower than average for the market as a whole but higher than peers such as Royal Caribbean.