Broker snap: Carnival's valuation expensive, Morgan Stanley downgrades

25th Sep 2013 09:27

Morgan Stanley has downgraded its rating for cruise operator Carnival from 'equalweight' to 'underweight', saying that the stock's valuation looks 'very demanding' following its gloomy third-quarter results and guidance.The share price was down 7% at 2,100p by 09:30 on Wednesday, extending losses made the day before after the company reported that net income declined from $1.2bn to $1.1bn year-on-year in the three months to August 31st. It also said that bookings for the rest of 2013 and the first half of 2014 remain below the prior year and net revenue yields would be down 3-4% in the fourth quarter.Morgan Stanley labelled the outlook as "disappointing" after Carnival didn't commit to guiding to positive net revenue yields next year. It said it is now questioning the "smoothness" of this sluggish yield recovery as is implied by Carnival's valuation "given the track record of underperformance and still fairly high industry capacity growth".Meanwhile, the cost outlook - Carnival guided to another year of 4% net unit cost growth next year - also failed to please given that the company needs to reinvest in its physical product, distribution and marketing.Morgan Stanley said: "Essentially, modest yield growth will not quite offset cost pressures, so, net of FX and fuel moves, earnings per share seem likely to be flattish year-on-year in F14."The bank said that Carnival's valuation is "high", given that the shares trade at 22-23 times next year's earnings. It has cut its target price for the stock to 2,000."The shares have held up well in the face of significant earnings downgrades over the last few years, reflecting investors' increasing willingness to look through to a more normal yield environment. But 'normality' keeps being pushed out, and even on F15 the shares look expensive to us," the broker added.BC