Saturday, September 20, 2014

Carnival Corporation (CCL) Earnings Report: Smooth Sailing? CUK, RCL & NCLH

The Q3 2014 earnings report for cruise ship stock Carnival Corporation (NYSE: CCL), which also has a listing as Carnival plc (NYSE: CUK) and is a peer of Royal Caribbean Cruises Ltd (NYSE: RCL) and Norwegian Cruise Line Holdings Ltd (NASDAQ: NCLH), is scheduled to report earnings before the market opens on Tuesday (September 23rd). Aside from the Carnival Corporation earnings report, it should be said that Royal Caribbean Cruises Ltd reported Q2 2014 earnings on July 24th (profit rose fivefold on higher European demand) and Norwegian Cruise Line Holdings Ltd reported Q2 2014 earnings on July 29th (investments in new ships and fleet modernization helped earnings that beat expectations). However and the last time around when Carnival Corporation reported earnings, year over year comparisons may have been misleading because of an embarrassing February 2013 incident when a fire on the Carnival Triumph left the ship without power in the Gulf of Mexico and passengers stranded aboard the stalled ship for four days until it was pulled into port by several tugboats.

What Should You Watch Out for With the Carnival Corporation Earnings Report?

First, here is a quick recap of Carnival Corporation's recent earnings history along with EPS estimate trends from the Yahoo! Finance analyst estimates page:

Earnings HistoryAug 13Nov 13Feb 14May 14
EPS Est 1.30 0.00 -0.08 0.02
EPS Actual 1.38 0.04 0.00 0.10
Difference 0.08 0.04 0.08 0.08
Surprise % 6.20% N/A 100.00% 400.00%
EPS TrendsCurrent Qtr.
Aug 14Next Qtr.
Nov 14Current Year
Nov 14Next Year
Nov 15
Current Estimate 1.44 0.20 1.74 2.37
7 Days Ago 1.44 0.20 1.75 2.37
30 Days Ago 1.44 0.20 1.75 2.36
60 Days Ago 1.44 0.20 1.74 2.36
90 Days Ago 1.51 0.18 1.72 2.36


Back in late June, Carnival Corporation reported second quarter revenues of $3.6 billion verses $3.5 billion for the prior year. Non-GAAP net income came in at $80 million, or $0.10 diluted EPS verses non-GAAP net income of $57 million, or $0.07 diluted EPS while GAAP net income, which included a net gain on vessel transactions of $15 million and net unrealized gains on fuel derivatives of $11 million, was $106 million, or $0.14 diluted EPS. For the second quarter of 2013, GAAP net income, which included a gain on a ship sale of $15 million and unrealized losses on fuel derivatives of $31 million, was $41 million for $0.05 diluted EPS. The President/CEO commented:

"We benefited from effective marketing initiatives, which combined with a gradually improving economic environment, led to revenue yield improvement for our continental European brands in the quarter compared to the prior year and is expected to continue through the remainder of the year. In addition, we achieved a six percent improvement in fuel consumption." 


"Collectively our brands are gaining momentum in our efforts to drive higher ticket prices and we continue to expect sequential improvement in revenue yields, despite a more competitive environment in the Caribbean this summer. We remain focused on further understanding our guests and refining the exceptional customer experience we provide. We have also made significant strides in our efforts to identify opportunities for cross-brand operational efficiencies. This work is still in the early stages, but we are making progress and beginning to see encouraging signs. We believe we have reached a positive inflection point for our company as we return to earnings growth in 2014 and work hard to ensure that growth accelerates in the years to come."

After earnings, UBS analyst Robin Farley called the forecast a "surprise" for a quarter that would have plenty of European and Alaskan cruises to offset weakness in the Caribbean business (Note: About 35% of Carnival's passenger capacity was in the Caribbean in the year ended November). Industry analyst Stewart Chiron has also commented that Carnival Corporation and Royal Caribbean were pointing to Europe-based MSC Cruises that is offering 7-night cruises in the Caribbean for as low as $199.

On the news front and in early July, Jefferies said its latest pricing data at Carnival Corporation is weaker than in recent months and that it continues to see risks to 2015 consensus estimates. The firm reiterated an Underperform rating on the stock with a $33 price target, preferring Buy-rated Royal Caribbean. Jefferies noted that its pricing data supported Royal's 2014 earnings guidance.

Yesterday, UBS analyst Robin Farley said that cruise operators benefit from less capacity in mature markets, but those with the scale to deploy ships to China benefit the most - namely Carnival Corporation and Royal Caribbean Cruises. Next year, Carnival Corporation plans to move its fourth ship to China, the 2,928-berth Costa Serena, which sails in the Mediterranean.

What do the Carnival Corporation Charts Say?

The latest technical chart for Carnival Corporation shows shares bouncing around between two trend lines since the start of the year:

A long term performance chart shows that Carnival Corporation has underperformed both Royal Caribbean Cruises Ltd and Norwegian Cruise Line Holdings Ltd:

A technical chart for Royal Caribbean Cruises Ltd shows a strong and fairly steady uptrend while Norwegian Cruise Line Holdings Ltd hit rough seas back in the spring but has since recovered:

What Should Be Your Next Move?

Irrespective of the coming earnings report, I am not so sure about Carnival Corporation being the best cruise ship stock for investors. The industry is also highly cyclical with summer bookings being made in winter. Hence, the timing may not be right for new investors to take up positions in cruise ship stocks.

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