GrowthSpotting: The Art of Global Investing
This series cuts through market noise to explore what we believe are the most relevant and inevitable global trends for investors seeking growth.
In it, we take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA®” (Mass Affluence, New Technology, Restructuring and Aging).
Today’s post focuses on Mass Affluence and luxury online retailing.
It’s about that time of the year. The winter blues are kicking in and thoughts turn to sunshine, white sand beaches and crystal clear waters. You see the ads on TV and it’s almost too much to resist – movies by the pool, spas, mini golf, casinos, musical productions and more. Welcome to cruising, where the journey is the destination. It’s no wonder that the cruise industry is the fastest growing segment of the travel industry, increasing the amount of passengers at a 7.6% average annual clip since 1990.1
“Build it and they will come” is certainly the unofficial mantra of this industry. Over the past 20 years, cruise ships have evolved into floating cities with on-board amenities and activities that rival many onshore vacation destinations. At the head of the pack in terms of innovation is Carnival Corp. (CCL), the largest cruise company in the world with a fleet of 100 ships. Its brands, including Carnival, Princess, Holland America, Cunard and Costa, control just over 50% of the global cruise market. The next largest is Royal Caribbean, a distant second with around 25% market share.
The high barriers to entry, including significant shipbuilding costs and high levels of brand loyalty, makes Carnival’s market share more defendable. Furthermore, the company’s strategy of targeting somewhat different demographics in different regions with different brands, ranging from mass market Caribbean cruises with Carnival to luxury transatlantic crossings on the Queen Mary 2, allows it to grow without significant cannibalization.
Still Seas to Sail
Despite the strong growth over the past couple decades, the penetration rates for cruising are still very low, averaging around 2%-3% globally.2 I believe this provides a significant growth opportunity for Carnival. While the combination of new ships and new destinations has helped Carnival target a younger target audience over the past several years, the core of Carnival’s clientele is over 50 years of age. People in their 50s and 60s are among the fastest growing segments of the population in both the U.S. and in Europe. Carnival’s brands are well-positioned to take advantage of this demographic trend.
Yet another growth opportunity lies in Carnival’s ability to diversify geographically. Carnival plans to add just two to three ships per year, down from a total of 10 new ships in 2010 and 2011. Most of the future ships will be cruising outside North America.
I believe the lower levels of capital expenditures that come with fewer new ships, as well as an ongoing cost cutting program, should help drive returns and free cash flow. Cash from operations in 2012 totaled $3 billion. This not only allowed the company to invest in growth, but also to pay out $1.2 billion in dividends in 2012 and sustain a share repurchase program. Carnival trades at a forward PE multiple4 of 16, with a forecasted long term growth rate of around 16% per year.5 This is an attractive trade off, in my opinion, particularly given the great dynamics of an industry riding the powerful, long-term currents of mass affluence and aging.
- Cruise Lines International Association (CLIA) – 2011 Cruise Market Overview
- CLIA – 2012 Industry Update
- Carnival Corp. 12/20/12
- The forward PE multiple is a firm’s market value, or price, divided by its estimated earnings for the firm’s coming fiscal year.
- Bloomberg data as of 1/31/13
Past performance does not guarantee future results.
The mention of specific securities does not constitute a recommendation by any Oppenheimer fund or by OppenheimerFunds, Inc. Certain Oppenheimerfunds may hold the securities of those companies mentioned. There is no guarantee that the issuers of stocks will declare dividends in the future, or that if they are declared, they will remain in their current level, or increase over time. There is no guarantee that the issuers of stocks will declare dividends in the future, or that if they are declared, they will remain at their current lvel, or increase over time.