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Company Spotlights: 4Q19


CCL

Carnival Corp (NYSE: CCL)

Carnival is the largest cruise operator in the world with approximately 45% of the global market. The company does business under the Carnival Cruise Lines, Princess Cruises, Holland America Line, Seabourn Cruise Line, Costa Cruises, Cunard Line, P&O Cruises, Ocean Village, Ibero, AIDA and P&O Cruises Australia brands operating over 100 ships with total passenger capacity exceeding 200,000 berths. Each year, Carnival offers itineraries covering a wide array of destinations and excursions around the globe to more than 12 million passengers.


Europe and Alaska

In early 2019, Carnival management warned of weakening yields in its fiscal year. Carnival has a higher exposure to Europe and Alaska versus its competition, and those geographies saw significant increases in the number of ships operating throughout the year. Growing competition resulted in weaker pricing for cruises in those regions. We expect continued pressure in the near term, but believe the supply and demand for cruises in Europe and Alaska will stabilize and improve. Additionally, if conditions remain challenging, Carnival has the ability to move its ships to other locations to also strengthen returns.


Missed Opportunity in Cuba

In 2019, the Trump administration banned cruises, private yachts and fishing vessels to Cuba, resulting in cancellations and upset passengers who were looking forward to visiting the island. Cuba has long been viewed as an incredible addition to Caribbean itineraries since few have traveled there. The close proximity of Cuba would allow Carnival to add a desirable destination with little cost. Hopefully, in the future, the island will once again be accessible to U.S. travelers.


Industry Leader

The company remains an industry leader with its fortress balance sheet combined with significant size advantage over its competition. Its balance sheet strength allows Carnival to self-finance ships in difficult market conditions, which is not an option for smaller competitors. Given its scale and focus on affordable travel, the company is the market leader in price and the low cost producer in the industry.


Intriguing Valuation

We believe the market continues to focus on the headwinds Carnival has faced in Europe, Alaska and Cuba, rather than recognizing the company’s steady growth in earnings power in recent years. We believe Carnival remains an intriguing investment opportunity as the market underappreciates its advantages, including the stability of its business over time. In our view, management has righted the ship and is sailing towards strong future profitability. As of December 31, 2019, shares traded at $50.83, a 19% discount to our steadily growing private market value of $63.11.







NLSN

Nielsen Holdings plc (NYSE: NLSN)

Nielsen is the global leader in critical data and analytics regarding consumer viewing and buying habits. The company’s Media business formulates the ubiquitous Nielsen rating, the audience measurement system for U.S. television programming. Its Connect business amasses consumer purchase data unmatched in geographic scale, and is therefore mission critical information for the world’s leading packaged goods players. Recent headwinds, primarily in the Connect business, have reignited long-standing bear arguments that heightened consumer fragmentation across both businesses is an existential threat. However, we believe this fragmentation makes Nielsen’s data even more valuable. Moreover, the recent decision to separate the businesses into two independent companies should unlock underappreciated value.


Measuring a Widening Moat

The bulk of Nielsen’s wide moat1 stems from its Media business. Comprised of thousands of household panels and cable box data, the Nielsen rating is the undisputed currency used in billions of dollars’ worth of media and advertising decisions globally. As media behemoths grapple with increasing competition, the proliferation of non-linear distribution, and a viewership base that is increasingly using multiple devices, Nielsen’s comprehensive measurement capabilities are only growing in importance. The company’s Total Audience Measurement combines advertising ratings and content ratings across both traditional and digital platforms to serve as the only independent and holistic measure of viewership in the marketplace. At a recent conference, even past skeptic and Netflix CEO Reed Hastings cited Nielsen’s ratings as the objective judge of the streaming wars.


Buying Connect for Free

For the last few years, Nielsen’s Connect business has faced both competitive and macroeconomic headwinds. Its large consumer packaged goods clients have cut back marketing spending at the same time competitors became more aggressive on pricing. In response, the company substantially invested in differentiation and efficiency. Its new Connect Platform is a real-time subscription analytics product that better helps clients answer not only “what,” but “why” and “what to do.” Globally, the company has begun streamlining data collection and platforms to improve scalability. We believe today’s stock price implies that the market is giving virtually no credit to this unique and valuable asset, despite its improving fundamentals joined with the steadfast importance to consumer packaged goods clients.


Governing Value Creation

Over the last 18 months, the board conducted a full strategic review and put a new management team in place. Since that time, the company has consistently achieved clear and improving financial targets for both businesses. More recently, the dividend was cut to free up significant cash flow to pay down debt. Finally, the decision was made to separate the Media and Connect businesses. By this time next year, we believe both segments will be able to laser focus on accelerating growth and expanding margins. More importantly, the market will be forced to separately value these underappreciated parts.


A Long-Term View

At current levels, we believe investors are distracted by the rearview mirror—disappointed in the outcome of the strategic review and the past headwinds in the Connect business. Looking forward, we see a rare example of a wide moat franchise that stands to benefit from growing demand for measurement and analytics across an increasingly fragmented consumer landscape. As of December 31, 2019, shares traded at $20.30, a 40% discount to our private market value of $33.65.


1 An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.







TIF

Tiffany & Co. (NYSE:TIF)

Founded in 1837 by Charles Lewis Tiffany, Tiffany & Co. is a vertically integrated luxury jeweler best known for its diamond engagement rings, sterling silver craftsmanship, and eponymous blue-colored branding. What began in 1837 as a stationery and fancy goods store in New York has evolved into a world-renowned jeweler with over 300 stores globally. The company, which practically created the engagement ring category, predominantly offers jewelry made from a variety of precious metals and stones while also selling watches, homewares, and fragrances.


Withstanding the Competition

Tiffany’s success over the last 182 years can be attributed to a textbook case of brand strength, which substantiates the company’s wide moat1. Historically, Tiffany had to compete with more budget-friendly “mom and pops” and value-oriented fashion jewelry brands. Today, internet and social media proliferation has eroded typical barriers to entry, and traditional consumer brands have been under siege by new, often lower-priced competition. Over the years, the company has demonstrated consistent pricing power in the face of these competitive challenges, which has translated into healthy margins and earnings growth.


Repeat Buyers

We have owned shares of Tiffany on and off since the early 2000’s. After exiting our position back in June 2017, we reinitiated a stake in late-2018 in an effort to capitalize on the market’s shortsightedness. At the time, the stock had declined nearly 50% from its summertime peak due to concerns of elevated geopolitical risks and the Chinese government’s crackdown on luxury goods imports. The latter was particularly concerning since roughly a third of all global luxury purchases are made by Chinese consumers and two-thirds of these consumers make purchases outside of China. Complicating matters further, the company was undergoing a transformation under the guidance of a relatively new CEO, Alessandro Bogliolo.


New Leadership

We took comfort in Mr. Bogliolo’s plan to reinvigorate the company through investments focused on strengthening its brand messaging, merchandise, buying experience, and operating efficiencies. While these goals were not unlike his predecessor’s, Mr. Bogliolo’s luxury-relevant resume and early successes at Tiffany increased our conviction.


Patience Wins

Ariel’s philosophy is rooted in patience and we understood Tiffany’s evolution would be a multi-year process. Its brand strength would support our margin of safety2 as the company implemented its long-term plan. Fortunately for us, we were not alone in our thinking. In late October 2019 with Tiffany’s shares trading below $100, luxury conglomerate LVMH proposed to acquire the company for $120/share in cash. For LVMH, who purchased Bulgari in 2011, Tiffany would provide more scale in the jewelry and watch category, putting it in a better position to compete against the likes of Richemont while increasing its U.S. presence. In the weeks that followed, LVMH subsequently raised its bid to $135/share and a deal was consummated on November 25, 2019. The sale price represents more than an 80% premium to the multi-year lows experienced in December 2018.


1 An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.

2 Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.








Investing in small cap and mid cap stocks is more risky and more volatile than investing in large cap stocks. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market.

On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds, one of which was a top performer for the quarter, one was a new addition to a Fund, and the other was, in our view, undervalued by the market. The information and our opinions were current as of December 31, 2018, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased, sold, or recommended to investors during the period. Investors that were not invested in a Fund that held each stock for the entire holding period shown will not have experienced the performance shown. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.

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