Will Carnival Triumph or Fail?

With shares of Carnival Corporation (NYSE:CCL) trading at around $37.46, is CCL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The Carnival Triumph has been adrift at sea for too long. The original plan of tugging the cruise ship to Progreso, Mexico, was scratched after the boat drifted northward due to strong currents. The new plan is to tug the boat to Mobile, Alabama. Carnival plans on booking more than 1,500 rooms in Mobile and New Orleans for its passengers. One benefit to this plan is that passengers won’t have to deal with passport issues. On the other hand, to make this situation a little bit more challenging, there is a cold front that will lead to 15 to 25 mph winds and 4 to 6 foot waves. This isn’t expected to impact what is taking place on board, but it’s not going to help, either.

The good news is that there have been no injuries from the fire. According to CEO Gary Cahill, all resources have been committed to getting passengers home as fast as possible. He was apologetic (and nervous) in his press conference when he added that the conditions on the ship are very challenging. He also added that 20 charter flights will fly to Houston on Friday – this is after passengers stay in hotels to rest today.

The biggest issue in this whole debacle is that Carnival and passengers have two different accounts of what has been taking place. According to passengers communicating with relatives, there is no running water, there are no operational bathrooms, toilets are overflowing, passengers are sleeping on the deck because it’s too hot inside the cabins due to poor ventilation, and there is very limited food. Both Carnival and passengers have stated that plastic bags are being used as toilets.

So…the question becomes: will this affect the stock price? The first thing that should be pointed out is that a similar incident took place in 2010 with the Carnival Splendor. Over 4,500 people were stranded for three days due to a fire in the engine room. In that case, the cost to Carnival was around $40 million. In this case, there is no telling what the overall costs will be, but it’s likely to exceed $40 million. In addition to free hotel rooms, charter flights, and free trips in the future, Carnival is offering $500 to passengers as compensation. With 3,143 passengers on board, the cost will be $1,571,500. That’s not going to break the bank, but it will add to the total. It’s safe to assume some passengers will try to take legal action against the company, too, which could be costly.

Since the Carnival Splendor incident in 2010, the stock has held up well. Actually, it has outperformed the S&P 500. In most cases like these, investors will have a tremendous buying opportunity. The tricky aspect of this situation is that the financial cost isn’t likely to be the biggest threat. With two Carnival-related incidents over the past three years, and four incidents throughout the industry over the past three years, the biggest threat becomes trust. When trust is lost, so are future profits.

Let’s take a look at some more important numbers prior to forming an opinion on this stock…