 Good day, fellow investors! One of the most requested stocks for me to analyze last week was Carnival Cruises. The stock is down, so I can understand why many people wish to analyze it and it's also analyzed by another channel, so therefore probably the interest. But in this video I'm really going to show how I approach analyzing a new stock, a stock that I haven't analyzed in the past and you'll see the four steps that I usually make before deciding whether I'll keep researching it, whether I'll put it on my watchlist to learn more about it or simply disregard it or come back to it somewhere in the far far future. So let's start immediately with the first stop step when it comes to analyzing a new stock. The first step is categorizing the stock, look at the sector, make a small fundamental analysis and then conclude on what's next. On stock categorization probably the best, the best way to do it is to do it as we have done it in the recent Peter Lynch video about stock categorization, what is the stock and then how does a stock behave, what are the characteristics when it comes to investing, what should you look at and then you know okay what are the risks reward and what you should expect from such a company. I like to use Morningstar, there is always 10 years of data there and then number one I have revenue, 10 years of revenue. I see it is a slow growth company from 2010, revenues have been 14.4 billion now 21 billion. Operating margins are volatile which means it's a cyclical stock, we have seen operating margins 16% then down to 8% in 2014, slow down in Europe and now for the last few years all good. Dividends have been growing over the last 10 years, didn't go and check what was the case in 2007 but earnings have also been volatile and very very strong earnings in the last few years with the 15% net margin. Line number four there have been significant buybacks especially over the last four years when things have been good. Operating cash flows look very very nice, 5 billion on 25.5 billion on 21 billion in revenue that's what 25% operating cash flow margin but what also intrigues me is the huge capital spending line number six where you see that the company spends 5.5 billion on capital on what that's what the money it's necessary to run the business as is and grow. We'll see later they are buying new ships but the free cash flow has been pretty pretty meager over the last year a little bit better previously and the 2 billion over the three four good years preceding this year is what gives you what 2 billion on a 20-something market cap now it was a 5, 6, 7% dividend yield that everybody was so attracted. However high capex is something interesting cyclical and slow growth so that's how I would categorize the company slow growth okay Peter Lynch says stay away from slow growers because that's what you should expect from them apart from the dividend slow growth somewhere something explodes thanks to valuation but not something you should bet on it plus the company is really big it has 21 billion in revenue in a 45 billion industry I know the positive tailwinds and everything but still slow growth we can't expect miracles there the margins are also pretty high we and it is also cyclical depending on how things go into the economy and what's going on also with viruses around the place when it comes to cyclicals what are the expectations where you know the company is going to suffer where when there is no economic growth 50% as you probably know if you follow the company 50% drops are normal if you buy at the wrong part of the cycle you can wait years before seeing another upswing this is a presentation that I did for the other video check that video out for categorization of stocks then large and well-known companies like Carnival that make the unwary stock picker most easily part with his money because usually people buy this at the wrong moment in time when the fundamentals look good and not when the fundamentals look bad so Peter Lynch really suggests you should buy an up turn in earnings not a downturn timing timing is everything watch for inventories the number of boats and for new monk market entrance that's also something we are going to discuss stock usually declines when peak earnings is reached and investors expect the next recession as you can see peak earnings have been reached 2017 2018 and since then the stock has been in the client steady slow and steady but because there is not much more the stock could offer and now with the coronavirus the stock has been hit even more if we look at the earnings how those peaked around four dollars 2018 and then stabilized because then you see such things at as I don't know splitting boats into to make them bigger to make more and more and that's not the growth you want to invest in you want to invest in the trend from 1.5 earnings to four dollars and that's also where the investors made the more money if you buy later in the wrong time of the cycle you can lose a lot of money so it's easier to predict an upturn then a downturn in the industry and that's when you have to buy it when things will be better and when things are bad that it cannot get worse it's a difficult mindset concept to understand but that's how you invest in cyclicals on the sector step number two we have categorized the stock okay let's look at the sector what's the story there it's a growth sector aging population though they love cruises they have the time to go on cruises and that is very positive huge growth over the last 10 20 years probably if things stay normal continue but there is also a lot of competition there are 55 cruise line growth cruise cruise lines globally with a total of 278 ocean ships and another 19 scheduled to be launched in 2020 that's 10% supply addition more inventory which is also risky and we have seen the virgin cruise also business being launched which means that there is money to be made in the sector so the oversupply is a bit higher than sector growth but still high growth however the coronavirus the short-term sector situation is very risky and when you see such headlines that's not good for the business definitely bookings are already collapsing for a for example in Italy that's something I know from personal connections but I assume also bookings for flights for ships will be decimated after people have been seeing this especially if the virus persists over the next six months year then this will be the worst hit industry because it simply cannot defend itself against viruses and that's something okay you might look for an opportunity but then you know that this the repercussions of this will be seen in six months in the annual report then the fundamentals will not look as good the stock will be down and then it will be the time to buy if you can see an upturn so be patient and you'll find your time perhaps it will be like air traffic 9-11 it took a few years and then we had SARS also it took few years for air traffic to recover from that reminder that stayed in people's mind we'll see how long it lasts perhaps if you're investing here you remember 2013 when carnival and other lines were affected with norovirus and legendars disease and the leg for people for the market to forget lasted from six to nine months I think the coronavirus is more serious so it might last a bit more for people to forget and book cruises like it has to been the case in 2019 from where you are looking at the fundamentals now until it's over it will be bad and if you want to invest you invest in the upturn so operating margins have been very low 2012 13 14 and I think those will go lower even now given the recession possible given the coronavirus impact given the low bookings no matter we already see them now no matter how long if this will last so this might be a company that has similar earnings as back then of what one billion one billion something perhaps even negative earnings depending on the situation and then looking at the upturn looking at an improvement you might wish to reconsider this over the long term then step my number three for me is okay what are the average earnings compare that to the market cap and I'm looking for long term 15% returns from the business over cycles thanks to the growth and everything we know it's a slow growth company and we see that slow growth that has been there with the stock for the past 20 years if I compare stock prices except for the dividend investors didn't make much money over the last 20 years this is perhaps also because of the huge capital requirements that are not redistributed to shareholders but have to be kept in the business for just maintaining that position in any case the earnings are now 3 billion on the current market cap of 22 billion that's a price earnings ratio of 7 which means okay great returns but what you have to keep in mind is that the earnings are from 2019 which was an amazing year for cruises stocks are at all times high so okay let's sell something of our portfolio if you are a re-theory and simply book a cruise and enjoy it now the stocks are down less money less everything so it could be a really bad year and then earnings could be 1 billion so I would say this company perhaps will have earnings of 2 billion on average over the long term and then it's a cyclical so a few bad years can really hammer down the stock as it has been the case 2009 2000s so that's it's something that is not uncommon for the stock if you look at the long-term chart and therefore I would say okay if I would consider this for a purchase I would go for 1.5 earnings which means that the market have kept for me to consider this should be 10 billion not more I know there is a big price to book value the big will see later the assets but still I'm investing in the cash flows I'm investing in long-term cash flows and this is what I see when I look at this net income average we are now in a very good place 3 billion has been as low as 1 billion in 2013 prior to that 2 billion slow grower high capex requirement so it would take a little bit more for 15% returns if you're happy with 10% returns then you might be there but accept volatility in the stock price which means that you might get it even lower so stage your purchases if you are buying this if we look at the balance sheet okay assets are there the debt given the cyclicality of the business is very low which is very good for the management a good approach to investing in the sector but it's always the question about cash flows and capex and when I look also the fundamentals the story of the business they have 104 ships and they will get 17 new ships to be delivered through 2025 which means that they will are increasing their inventory in we will see how long will the downturn for the industry last that's an uncertainty that is an unknown and their new build schedule peaks in 2020 with six new ships entering the market the market is pretty bad so that is wrong timing but they could not have expected that nevertheless the results of what's going on now will be seen later in six months 12 months a year two years and that's where you have to look for those low-risk high-reward investments now it's still significant risk for relative reward it might double perhaps in the next year if it rebounds two years but you never know what is the downside what will be the impact on the sector on the company of this significant hit of this significant coronavirus hit so my quick conclusion is this is a typical cyclical stock with additional risks from viruses as we have seen the environment who knows if the European Union will ban cruise ships because those emit more CO2 than all the cars in Europe so the messages buy when things look extremely bad the market has forgotten about the stocks and earnings might quadruple four times in the next two to four years that is where you make the money as investors have made the money five six years ago when that actually happened for the earnings well I hope you're not disappointed with my research subscribe and click that notification bell if you like this kind of analysis and my approach to investing where we are looking for good businesses that offer those three four times and growth in earnings no matter what thank you for watching looking forward to comments and I'll see you in the next video