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Morningstar | Carnival's European Outlook Hinders 2019 Forecast as Cyclical Headwinds Abroad Persist

Carnival is the largest company in the cruise industry, operating nine global brands with more than 100 ships in service and passenger capacity of more than 200,000, allowing it to reach a diverse group of consumers in a lightly penetrated vacation segment. Efficient scale, the lowest unit costs in the industry, and intangible brand assets provide the company with a narrow economic moat.Carnival's market is underpenetrated, with less than 4% of the domestic market ever having cruised. With low domestic penetration rates and even lower international recognition (less than 3% in Europe), upside potential remains significant. The repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific should help balance supply in high-capacity regions like the Caribbean, which should provide for more strategic pricing tactics globally. In our opinion, Carnival has the best ability to capitalize on these underserved international markets, thanks to its global reach and tailored fleet.Domestically, the aging population remains key regarding the supply/demand imbalance in the cruise industry. This segment will drive demand and create a disconnect between demand and supply of berths for at least the next 10 years as the 65-and-older demographic grows faster than overall cruise industry capacity. Carnival continues to source about half of its customers from the region, where stable employment should support consumers' willingness to spend, helping the firm trend toward double-digit adjusted returns on invested capital (we forecast ROICs of 9%-10% until 2023). However, uncertainty abroad from Brexit and a slowdown in Italian growth could waylay further ROIC improvement in 2019.The firm is set to receive 19 ships between 2019 and 2023, boosting supply growth over the next five years. In our opinion, it can still lower costs through improved procurement expenses and better fuel efficiency; ships using liquefied natural gas came into service in 2018. It can also improve revenue via the revenue management optimizer it implemented across six brands, which should help improve EBITDA margins to 29% from 28% over the next five years.