Carnival: SHIPS OF STOOLS NO LONGER?

Takeaway: CCL looks washed out (as are the bathrooms on the Triumph, finally) while RCL may be the stock at risk.

This is indeed a pivot for us - we’ve been crapping on Carnival (CCL) all year.  But with most of the issues flushed out, the stock may be bottoming out. 

Carnival: SHIPS OF STOOLS NO LONGER? - carcruise

In our latest pricing survey, Europe looks stable and with easy upcoming comps, CCL’s large European exposure should be an asset.  Moreover, CCL is doing better than the competition in Alaska and while the Caribbean outlook is still somewhat cloudy, our pricing survey did not indicate any further deterioration for early 2014 itineraries.  Could we be early?  It’s happened before but the hedge of Royal Caribbean (RCL) on the other side might be the solution, for those so inclined to a pair trade.

Our pricing survey actually presented a more uncertain 2014 for RCL.  Given RCL’s newfound position as the Cruise bellwether and recent stock appreciation to match, the risks look greater for that stock.  RCL won’t feel the Europe tailwind (“Europe tailwind”? it’s no longer an oxymoron) to the extent of CCL. 

Regionally, RCL faces pressure in all of its markets – potentially from CCL’s aggressive marketing strategy.  Pricing is way down in Alaska and Europe and RCL is overexposed to the Caribbean (highest since 2007) where visibility is the lowest.  Sell-side sentiment seems the most bullish in over 2 years.  While valuation is in-line with historical levels, RCL's earnings are at risk.

Here are some of the differentiating factors between CCL and RCL:

Editor's note: This is a brief excerpt from a recent report written by Hedgeye Managing Director Todd Jordan. For more information on how you can access Hedgeye Research click here