Smooth Sailing for Carnival
We plan to raise our fair value estimate on the narrow-moat company.
Spending on the experience economy continues to benefit narrow-moat Carnival, (CCL) as pricing gains cover more ground in 2017. During the first quarter, the company captured as-reported yield growth of 1.1%, well ahead of the negative 1.4% our model was tracking, while net cruise costs fared a bit worse than our model had implied, given the timing of expenses. That said, with the wave season largely unfolded, 2017 appears well positioned to accomplish expanding EBITDA growth, with Carnival noting cumulative advance bookings that are well ahead of last year at considerably higher prices. In that vein, Carnival raised its outlook for the full year to include as-reported yield growth of 1.5% (from flat), as-reported costs that are flat (from down 1.5% prior due to foreign exchange), and earnings per share in the range of $3.50-$3.70 (increased from $3.30-$3.60, and in line with our prior $3.57 EPS estimate for 2017).
We plan to raise our $60 fair value estimate by about $3 to account for the first-quarter outperformance and see some gains in higher-than-expected pricing ahead as partially offset by higher-than-forecast costs in our prior model. On top of this, we plan to add about another $2 for faster capacity growth, which is expected to rise at a 4.5% compound annual growth rate through 2021, faster than the 2%-3% we had included in our valuation over the next five years. This would indicate shares as undervalued, trading at 16.6 times the midpoint of updated guidance, and at about a 10% discount to our updated fair value estimate.
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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.