Global Demand Holds Up for Undervalued Carnival
Cumulative advanced bookings for the first half of 2017 were ahead of last year at higher prices for this narrow-moat cruise operator.
Narrow-moat Carnival (CCL) offered some hope that the European season would remain decent in 2017, indicating performance across the Caribbean, Alaska, and Europe held up in the periods ended Aug. 31, despite uncertainty surrounding Brexit and numerous terrorist incidents earlier this year. Although it still remains some time away, we were glad to hear that cumulative advance bookings for the first half of 2017 were ahead of last year at "considerably" higher prices. While the company noted that bookings had slowed since June, it indicated that it was as such because less inventory was left for sale, and that inventory that had been sold since June was sold at significantly higher prices. We expect some uncertainty remains surrounding sourcing Americans for European itineraries in the second and third quarters next year, but think the risk profile of Carnival is lower than its peers', as it sources locally to a greater extent or locally branded product lines (AIDA, Costa P&O).
We don't plan any material change to our $58 fair value estimate and view shares as undervalued at current levels, trading in four-star territory. We plan to tick our 2016 estimate up modestly from $3.31, as performance in the third quarter tracked slightly better than our internal cadence implied, thanks to better than expected as-reported yields (which increased 0.4% versus our prior expectation for slightly negative yields). Carnival raised its earnings per share guidance by $0.05 at the midpoint, to $3.33-$3.37, helped by better yield performance and incremental share repurchases. In our model, this upside is offset by lower capacity growth in 2017 than the 3.9% we originally modeled (at 2.5% now), as drydock days rise from 380 in 2016 to 470 in 2017. Furthermore, all else equal, foreign exchange and fuel are expected to provide a $0.28 headwind year over year in 2017.
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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.