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Stock Strategist

Brand Equity Improvement Could Set Carnival's Profits Sailing

Price improvement and cost controls should improve ROICs.

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 Carnival (CCL)/(CUK) has been capitalizing on its scale to improve its cost structure in recent periods. While we believe the company has the ability to negotiate costs with its partners and vendors better than most (if not all) cruise operators, we think the team may have been distracted by mishaps that disproportionately affected Carnival's brand image over the past few years, leaving operating efficiency as a secondary focus. However, over the past year, we have heard increasing detail on cost-saving opportunities at the enterprise level, and we think scrutiny of spending could structurally change the expense profile of Carnival.

Additionally, now that brand equity improvement appears to be well underway at the Carnival and Costa brands, the ability to raise prices in response to consumers' rising willingness to spend seems feasible, and we think this is the catalyst that can boost revenue quickly. Locally, we believe this will be a function of a middle-income consumer who feels increasingly positive about discretionary spending, which should benefit the Carnival brand over the near term--we have already seen stabilizing yields in the Caribbean, a key deployment market at the brand. Higher potential pricing and conservative cost growth should lead Carnival to the double-digit returns on invested capital it seeks, which we forecast the company to achieve in 2018. A moderate drop in the share price would offer investors the opportunity to participate in the potential payoff from initiatives the company has underway.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.