In December we made a portfolio adjustment in the Yellowstone Partners All-Cap Global Strategy, selling Amazon.com (AMZN) and buying Carnival Cruise Lines (CCL).
Our thoughts were simply that Amazon was fully valued, having risen drastically throughout the Christmas season. In fact, it reached a point where by some metrics it could be seen as double the valuation of other retailers with similar margins. The other major area of concern was the possibility of cash-strapped states looking to tax online retailers. Breaking news today showed that at least one state, Colorado, took a step exactly in that direction.
We added Carnival (CCL) to the Yellowstone Partners All-Cap Global strategy, seeing it as a great way to play the value vacation theme with strong fundamentals that seemed to be improving. After listening to the CCL CFO today, we feel even more encouraged by the prospects for the company, and confident that management will continue to navigate the Cruiseline operator to smoother seas.
What has always impressed us about Carnival is that they have operated with a very clear, consistent strategy. They operate 11 brands, each of which is specifically targeted to a particular customer group. Additionally, with 80% of Americans, and less than 10% of Europeans having ever cruised, they see broad opportunity to increase passengers, and consequently, profits.
In terms of tangible metrics that we feel give CCL an edge, we see that they have held their cost per berth in line at an industry low for almost 20 years. Thier numbers show that their costs are a little more than 10% lower than their competitors, and even still they see opportunity to continue to reduce costs.
Recently they’ve keyed in on fuel efficiency, developing systems to optimize usage. For example, they find that if they can keep the “cut line” of the ship within a certain range, they can reduce costs. So because passengers are always moving, they have ballasts which they adjust in order to maintain that balance. They’ve also begun treating the hulls with silicone paint, which reduces algae and drag.
More than anything, what is apparent is that the company, from the managment to the staff, is extremely cost-concious – exactly the kind of operation that is primed to take advantage of similarly cost-conscious cruisers.
As always, please remember that these statements should not be interpreted as a soliciation to buy or sell any security. Investing in securities entails risk which may not be suitable for all clients. Investments, while offering the potential for gain, may also lead to loss and no performance guarantee can or will be made.
CCL is owned in the Yellowstone Partners company 401(k), which is managed in the All-Cap Global Strategy. Neither CCL, nor AMZN is owned in personal accounts held by individuals at the firm.