Carnival Should Continue to Cruise Along Long Term
We don't think the commentary surrounding demand for cruising warrants excessive worry, and we're maintaining our fair value estimate and narrow moat rating.
Shares of narrow-moat Carnival (CCL) tumbled after reporting strong second-quarter results that included a downtick in full-year earnings per share guidance. With EPS now expected to fall between $4.15-$4.25 (from $4.20-$4.40 prior, and $4.00-$4.30 at fiscal year-end), investors are resetting their near-term expectations for the business. Moreover, third-quarter earnings forecasts are likely to come down nearly 10% given Carnival’s $2.25-$2.29 guidance versus our $2.47 forecast (and consensus outlook for $2.48), which we believe is the key issue weighing on shares.
We contend that the factors driving this change are out of the company’s control—the $0.10 downtick in the midpoint of EPS guidance stemmed from $0.09 of second-quarter outperformance and share repurchase accretion that was more than offset by higher fuel and foreign exchange costs of $0.19. However, all in, the constant currency outlook calling for yield growth of 3% (up from 2.5% prior) and a cost increase of 1% for the full year was largely unchanged. We don’t plan any material change to our $70 fair value estimate, which includes average yield growth of 2% and cost increases of just above 1% in 2019 and beyond, leading to EBITDA margins that expand to 32% over the next decade from 28% in 2017, as our long-term supply and demand factors remain intact.
While some concern continues to linger surrounding close-in Caribbean bookings given last year’s aggressive hurricane season and its impact on key ports like San Juan, we don’t think the commentary surrounding demand for cruising warrants excessive worry. Carnival noted that since March, booking volumes for the forward three quarters have been slightly ahead at prices that have been in line with the year-ago period. Given the strong booking cadence pre-2017 hurricane season, this still implies that the cruise business continues to attract consumers at a healthy pace and that demand for the product is not waning.
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Jaime M. Katz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.