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Michael Burry

Carnival Corp
NYSE:CCL
2000-2005
Industry: Cruise Line
Category: Cyclical/Best-of-Breed

Context
Carnival is the #1 cruise operator in the world.
During the 1990s, the world was Carnival's oyster, ROA marching upward from 8.4% to 13.3%, ROIC rose from 9.8% to 15%, ROE between 20.1-22.5%.

Why the Company was Mispriced
Fuel costs and interest rates rising, as well as supply of ships catching up with softening demand, resulted in pricing pressure.
ROE has slipped under 19%, and stock has fallen 60%.

Alternative View
Carnival has the highest margins and the best management in the industry.
The stock is trading at just 11 times earnings despite a long record of 20% growth.
With the company maturing and growth slowing, few are willing to be patient for the hiccups to stop.
The recovery could take the stock up three-fold in the next three to five years.
The company is currently a little over 60% through a $1 billion stock buyback it announced last February, retiring 10% of the stock.
The downside risk is low, as simply replacing the ships and other critical operating assets of Carnival would cost more than the current market capitalization, pricing the brand equity as a negative number.

Risks
While headquartered in Miami, Carnival is a Panama-chartered corporation and does not pay U.S. income taxes -- the overall tax rate is less than 1%.
This thumb in the eye of the IRS and the biggest risk to Carnival.
Will the IRS find a way to tax Carnival? It is an open question, but one that Carnival feels is answered in its favor.

Result
At time of writing, Carnival stock was trading at $25/sh.
Shares for the next 3 years were relatively flat, until 2005 where it reached $50/sh.
The 5-year CAGR is 15%.