Thursday, July 19, 2012

CCL: Cruising through a channel

Carnival Corp. (CCL) was cruising through an uptrend from early June until the day before earnings, June 21, when analyst talk about softening cruise pricing sent CCL's stock price into a 3% dive from $35.61 toward Davy Jones' locker.

A 144% upside earnings surprise the next day slowed the descent, and indeed CCL bobbed in the currents for a few days before sinking some more, until it halted at $31.99 on July 12.

CCL's price began rising again three days ago, on July 17, and the ascent accelerated today, reaching a high (so far) of $33.73.

Carnival operates cruise ships throughout the world (hence the lame maritime metaphors -- I take my amusement where I can find it).

The Doral, Florida company is the largest cruise ship operator in the world, with 11 individual cruise-lie brands and a fleet of more than 100 ships. Some of the brands in its portfolio are Carnival Cruise Line and Holland America in the U.S., Costa Cruises in Italy, Cunard Line and P&O Cruises in the U.K., and Ibero Cruises in Sain.

The recent price action, described above, is but a blip in a large sideways trend that has held sway since mid-2011. The price since then has ranged roughly between $29 and $35, with a few failed attempts to break out above and below that range.

The prospects for this leisure business, three years into the recovery, have left analysts largely unenthusiastic. The level of enthusiasm among the 15 analysts following CCL stands at a mere 7%. 

To me this suggests expectations that the sideways channel will continue. Fortunately for nimble traders, it is a channel wide enough to navigate for profit.

The decline to the recent swing low within the channel was a simple zig-zag, with an interim high of $34.70, which serves as the nearest resistance. From today's high, the price has 2.9% to go before encountering that resistance, and 5.6% before hitting the June high that marked the start of the decline.

Those distances allow for good profit from leveraged short-term plays.

Carnival reports return on equity of 6% with a moderate level of long-term debt, amounting to 43% of equity. Cruising is a business with heavy demands for equipment and workers, so I'm not surprised to see a return below 10%.

Annual earnings hit a low point in 2009, recovered in 2010 and then stalled in 2011. But this earnings series needs some perspective: 2009's earnings decline from 2007, pre-recession, was only 24%, and the 2010 recovery was 10%.

Given the magnitude of the hit leisure businesses took after capitalist finance collapsed in 2007/8, those changes seem remarkably small to me.

Carnival runs a seasonal business focused on those sunny days of northern hemisphere summer, the 3rd quarter. The company has reported increasing 3rd quarter earnings over a year earlier for the last two years.

The company has been profitable for at least the last 12 quarters, with 10 upside earnings surprises and two to the downside.

Institutions own 70% of shares, and the price is running above operational parity. It takes $1.62 in shares to control a dollar in sales.

CCL on average trades 3.1 million shares per day, enough to support a good selection of options strike prices. Open interest tends to run in the three figures, and the bid/ask spreads are moderately narrow.

These are options I can work with.

Implied volatility stands at 25%, at the bottom of the six-month spread. It has been running sideways the last few days after declining sharply from June along with the price of the stock.

Options are pricing in confidence that 68.2% of trades will fall between $31.12 and $36.06 during the next month, for a maximum gain or loss of 7%. Options volume is running well above its five-day moving average, by 170% for calls as 18% for puts.

The stock is trading at the top of today's fair-price zone, which runs from $33.17 to $33.61. The zone encompasses 68.2% of today's trades surrounding the most-traded price, $33.44.

CCL next publishes earnings on Sept. 17. The stock goes ex-dividend on Aug. 22 for a quarterly payout yielding 2.98% annualized. Traders holding long call options are almost certain to see those options exercised prior to the ex-div date.

Decision for my account: The chart suggests that CCL is a reasonable bull play. The financials aren't the greatest, but I wouldn't play as a long-term holdings.


I've opened a position in CCL as a bull put credit spread expiring in August, long the $31 put and short the $33 put. That structure is profitable down to $32.61, near where the current leg up began, and potentially has a maximum yield of 10% of risk. 


I had to give a bit in order to get a fill, an din the end it wasn't a very good fill. I would have preferred a better yield, although 10% is a reasonable risk/reward ratio in my book for a four-week position.

Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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