An Analysis of:
Carnival Corporation (CCL)
Introduction
Carnival Corporation (Ticker CCL) is a cruise ship company that offers its services internationally. They also own Princess P&O, another cruise ship line. This report will analyze some of the most important elements of the corporation, including its Articles of Incorporation, debt, equity, and risks. It will conclude with a recommendation or rejection on the purchase of CCL stock.
Articles of Incorporation
The restated Articles of Incorporation for Carnival Corporation were released in April 2003. The company was originally incorporated in Panama. The Articles of Incorporation mainly discuss purchasing and maintaining their ships and warehouses as well as participating in other maritime activities such as trading and investing. It also states that CCL has been authorized to issue 2,000,000,000 shares of common stock. The benefit of investing in Carnival Corporation is that they are very organized and professionally run. They keep detailed records of anyone who owns at least 3% of the company and have a set number for how large their Board of Directors should be. A downside to investing with them is that the company has a limit to the number of shares any one shareholder can own, which is unfair to shareholders who want to hold power in the company without owning a large percentage. This makes it so almost all of the power in the company goes to whoever owns the vast majority of the stock. Carnival Corporation does not have preferred stock.
By-Laws
The By-Laws state more details about how the company is run more specifically. Carnival Corporation has an annual shareholder meeting, but a spontaneous meeting can always be called by the Board of Directors. In most cases, a simple majority is required to make any sort of decision. Dividends are declared by the Board of Directors. A positive for the by-laws is that they are again very detailed. For example, they list who should run meetings if the usual leaders are not there. However, only shareholders who own a significant portion of the company can bring up issues at meetings. The secretary prepares a list of these people, but it can only be viewed in the city that the meeting will be in, so one must travel to the city to see it. This again shows the unfair balance of power favoring the highest executives of the company.
Liquidity, Financial Condition, and Capital Resources
Like most companies, Capital Corporation’s main goal is to increase their profitability, however they also emphasize keeping a strong balance sheet and investment grade credit rating. They are confident that their operating cash flows will be able to sufficiently fund their endeavors. Their investing activities are mainly buying ships, which they do not do often. For financing cash flows, CCL has been continuously paying off their debt. In Nov, 2017 their deficit was $7.2 billion and one year later it was $7 billion. While paying off their debt, CCL has still invested about $3 billion every year. They have been repurchasing stock since the repurchase program started in 2004. One problem Carnival Corporation faces is their acceptance of international currency. They are an international corporation, therefore if currency exchange rates change drastically, they may face a problem in the value of their assets or services dropping. If CCL had only used US dollars, their revenue would have been higher from 2017 to 2018. Carnival Corporation is also very vulnerable to fluctuating fuel prices of their ships. Their business relies heavily on fuel for their ships, so despite how much fuel prices fluctuate, they will still buy it. If CCL is using a significant amount of their cash on fuel, this may prevent of limit their ability to repay investors.
Credit Ratings
Average credit rating on bonds: A3/BBB+
These are both decent credit ratings, but not perfect. I think that this is because while Carnival Corporation is a respectable company with a good amount of assets, they are not as well known by the public. Typically, an A3/BBB+ rating means that Moody’s and S&P believe that this bond is a worthwhile investment, although it may be more risky than a Aaa/AAA stock.
Risk Analysis
Carnival Corporation was fined a huge amount of money over the past decade for dumping waste into the ocean. (“June Hearing Scheduled for Alleged Probation Violations by Carnival Corp.”, Travel Agent Central). This is a huge risk for their company not just financially but reputationally. The fines obviously take away capital from the corporation, because they have to pay these using cash and/or take out debt in order to finance themselves. In addition to this, many people who hear about the illegal dumping will not want to bring their business to Carnival Cruise lines and will choose other alternatives that they believe are more ethical. This will directly affect their revenue as well if existing customers leave or potential new customers are dissuaded from using CCL’s service. Customers who have knowledge of the business industry may do some research and learn that the Princess cruise line is also owned by Carnival and no longer buy Princess services as well, further hurting their revenue.
Carnival Corporation recognizes in their 10k that they have a big risk from fuel for their ships. They are extremely susceptible to fluctuations in fuel prices because they have to buy fuel or they cannot run their business. If there is a fuel shortage and prices go up dramatically, Carnivals expenses will also go up and their profits will suffer. There is not much that Carnical can do to reduce this risk, other than potential use invest some of their time in R & D to research fuel alternatives. The NPV of this should be analyzed to see if Carnival could potentially benefit from investing resources in finding an alternate form of fuel.