Should You Buy It: All Aboard Carnival - TheStreet

Shares of

Carnival

(CCL) - Get Report

-- the world's largest cruise operator -- have slumped lately. At Tuesday's closing price of $45.77, the stock is down 7% year to date and some 12% off its June highs.

At current levels, Carnival is trading at 13.8 times expected fiscal 2008 (ending November) earnings of $3.32 a share, which is a 13% discount to its historical average valuation.

Concurrently, the company's dividend yield has recently moved above 3%. This is the highest in Carnival's history and is a psychological level at which I've found that nonbank stocks tend to attract the interest of investors.

With that in mind, I'm here to answer readers' questions: Should you buy it? Is Carnival attractive to buy at current levels, or should investors take a pass?

The company posted solid fiscal second-quarter (ended May) results last month, despite rising fuels costs. Carnival earned 48 cents a share, a penny ahead of the consensus analyst estimate.

Revenue grew 9% year over year to $2.9 billion, meeting expectations. While fuel prices cut the company's profit margin by 80 basis points from the previous year, management said on the conference call that demand in the Caribbean market has stabilized and is beginning to improve.

This is key, because as customer travel in Europe and Alaska has remained strong over the last several quarters, inconsistent demand in the Caribbean has led to intense price competition with

Royal Caribbean

(RCL) - Get Report

and other cruise operators.

With 40% of Carnival's cruises in the Caribbean, improved conditions in this market could lead to upside in near-term earnings expectations. In the meantime, the company has targeted growing its fleet of 80 ships 25% by 2010.

Want more? Check out TheStreet.com TV video. David Peltier explains why Carnival is a great dividend and value play.

As for the dividend, Carnival pays out 35 cents a share, and investors at the close of trading Aug. 21 will qualify for the next Sept. 14 payment. The company has boosted its dividend four straight years and can comfortably cover the payout 2.4 times with expected fiscal 2008 earnings. Carnival's yield is twice what its competitor Royal Caribbean offers and 125 basis points more than what the average stock in the

S&P 500

pays.

It's also worth noting that Carnival CEO Micky Arison and his family own some 188.2 million shares of Carnival (30% of the company) and stand to receive about $263 million in annual dividends. With that in mind, I don't see much risk of the dividend being cut, even if the company's near-term earnings don't live up to expectations. In addition to the dividend, Carnival pledged in June 2006 to buy back $1 billion worth of its stock. At the end of June, management had $773 million (16.3 million shares) remaining on the repurchase program.

With stable customer demand and an improving pricing environment in the Caribbean, I believe that Carnival will continue to generate solid growth and to return cash to investors in the form of its dividend and buyback program.

With the stock now trading well below its historical average valuation following its recent pullback, I believe that Carnival is attractive to purchase at current levels, because it could trade up toward the low-$50s by the end of the year.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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