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Carnival Still Feeling the Heat

NEW YORK (TheStreet) -- Carnival Cruise Lines (CCL - Get Report) is still fighting bad publicity from February's "poop cruise," in which a ship called the Carnival Triumph suffered a fire traveling in the Gulf of Mexico and had to be towed to port while the whole world watched.

So far, however, the stock is holding up to the heat, thanks in part to a lot of investment support by hedge funds. It doesn't hurt that the chairman of Carnival, Mickey Arison, also owns the Miami Heat basketball team.

CNN's "Anderson Cooper 360" reported this week on documents it claimed prove the cruise line knew about problems on the Triumph before its fire -- charges Carnival quickly tried to refute.

A class-action lawsuit was filed against Carnival within days of the Triumph returning to port on Feb. 14, after the line offered passengers refunds, vouchers for future cruises and other compensation.

The Triumph's problems came a year after a ship owned by a Carnival subsidiary, the Costa Concordia , ran aground off the coast of Italy and another Costa ship, the Allegre, caught fire off the Seychelles, knocking out its power.

The problem in both the Carnival Triumph and Costa Allegre fires was traced to leaks from flexible engine fuel hoses. Carnival said the Triumph's hoses passed inspection before the ship left port. A lawyer for passengers suing the company told CNN, however, that notice had been sent before the voyage recommending spray shields be installed over the hoses, thus making Carnival negligent.

It was an investigation into the Allegre fire that resulted in the recommendation for shielding; plaintiffs in the Triumph suit say this was ignored, proving willful negligence. Carnival had sought dismissal of the suits in April, citing language on cruise tickets prohibiting class actions.

CCL stock was downgraded after its earnings report in September, and has just begun recovering. It hit a low on Oct. 9 of $36.51 but has since risen to its current price of just ovre $38. Its most recent earnings report this week showed a profit of $35 million, or 4 cents per share.

Carnival stock rose in after-hours trade, buoyed by reports Wednesday of buying by nine different hedge funds.

Carnival has been increasing its marketing budget to make up for the bad publicity, including a series of roadshows called Carnival Conversations, a "Great Vacation Guarantee" program, and a recent deal with Dr. Seuss Enterprises, headed by the author's widow, to put Dr. Seuss characters on its 24 ships.

The rest of the cruise industry, however, is leaving Carnival in its wake, thanks to lower fuel costs and rising consumer demand.

Royal Caribbean Lines (RCL) stock is up 35% so far this year, and Norwegian Cruise Line Holdings (NCLH) is up 34%.

Hedge funds may be seeing the potential for Carnival to meet its rivals' gains if it can put its troubles behind it. The question is whether it has.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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