Foreign Exchange, Fuel Headwinds Hurt Carnival's 2018 Profits
Cruise line still sails in a moat based on efficient scale, cost advantages, and intangible brand assets.
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.
Jaime M. Katz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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