Carnival: Buy, Sell, or Hold?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

Right now, I am trawling through the�FTSE 100�(UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold... and those I feel you should sell.

I'm assessing every share on five different measures. Here's what I'm looking for in each company:

Financial strength:�Low levels of debt and other liabilities.

Profitability:�Consistent earnings and high profit margins.

Management:�Competent executives creating shareholder value.

Long-term prospects:�A solid competitive position and respectable growth prospects.

Valuation:�An underrated share price.

A look at Carnival
Today, I'm evaluating�Carnival� (LSE: CCL  ) (NYSE: CUK  ) , a global cruise and travel company,�which currently trades at 2,303 pence. Here are my thoughts:

1. Financial strength:�Carnival has adequate liquidity to cover financial obligations, with net gearing of only 35% and an interest cover of five times. Although the net debt of 5.8 billion pounds is quite high at five times operating profits, cash flow is set to improve as the company intends to reduce shipbuilding and plans to introduce only two to three ships annually from 2013 to 2015 compared to a five-per-year average in the past.

2. Profitability:�While revenue-per-share growth has been consistently increasing by 10% per year over the last 10 years, earnings per share have declined from a high of 197 pence in 2008 to 103 pence in 2012. Operating margin and return on equity (ROE) have also deteriorated from 20% in 2003 to 11% in 2012 and 12% in 2008 to 6% in 2012, respectively.

3. Management:�Micky Arison is the CEO and chairman of Carnival Plc and Carnival Corporation. The son of the company's founder, Ted Arison, has been Carnival Corporation's CEO since 1979 and Carnival Plc's CEO since 2003. He has more than 30 years of experience in the industry and has built Carnival into the biggest cruise company in the world with a market capitalization of 4 billion pounds and earnings of over 9 billion pounds to date. Management has committed to increasing shareholder returns and opportunistic share repurchases the next few years and has announced the renewal of its $1 billion (660 million pound) share repurchase program.

4. Long-term prospects:�Carnival is the largest cruise company in the world, with 100 ships operating in the U.S., the U.K., Canada, and continental Europe. It owns a portfolio of leading brands that include�Carnival Cruise Lines�and�Princess Cruises�in North America and�P&O Cruises�and�Cunard Line�in the U.K.

The past couple of years have been a challenging time for the cruise industry: The global economic slowdown and volatile fuel prices have dampened demand and increased costs resulting in earnings per share declining in three out of the last four years. However, the company has responded by intensifying cost-efficiency efforts, reducing fuel consumption per unit by a cumulative 21% since 2007 and expects around another 5% reduction per unit in 2013. Also, with travel demand in Europe expected to be weak in the coming years, the group has focused on emerging cruise regions China and Japan.

5. Valuation:�Shares are trading at a trailing price-to-earnings (P/E) ratio of 19, above its 10-year historical P/E of 17. Consensus earnings per share estimates are 134 pence for the year, giving it a forward P/E of 17. It also currently trades at a price-to-book ratio (P/B) of 1.1, below its 10-year historical P/B average of 2 and sports a current dividend yield of 3.8%, twice covered.

My verdict on Carnival
Despite Carnival's mediocre results for the last few years, it remains the leading company in a largely underpenetrated industry. Along with Royal Caribbean, they control 75% of the world's cruise capacity. The company's plans of a more "measured pace of newbuilds" in the coming years bodes well for shareholders by way of increased dividends and share buybacks. However, the continuing weakness of the global economy -- along with its relatively high debt -- is a cause for concern, while recent incidents with�Costa Concordia�and�Triumph�may still be fresh on people's minds, which could affect demand in the near term. The shares' valuations seem quite expensive considering all the risks mentioned.

So, overall, I believe Carnival at 2,303 pence looks like a hold.

More FTSE opportunities
Although I feel Carnival is a hold right now, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Superinvestor." This exclusive report reveals the favorite income stocks owned by�Neil Woodford�-- the City legend whose High Income fund turned 10,000 pounds into 193,000 pounds during the 25 years to 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors.�Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.