Carnival Is Cruising Along Long-Term
Despite company commentary suggesting that yield growth is slowing, nothing warranted imminent concern about Carnival's ability to drive demand creation or manage its cost structure.
Narrow-moat Carnival's (CCL) shares tumbled after company commentary suggesting that first-half 2019 yield growth could be slower than fourth-quarter 2018 guidance (1%-2%). However, further detail on interim pricing weakness implied that this was largely regarding Caribbean demand, lapping a serious weather season last year that affected 2018 regional demand. In our opinion, this issue should be transitory and is unlikely to repeat in 2019, especially since the Caribbean has experienced a relatively quiet hurricane season in 2018. Given that we already had yield growth slowing to 2% in 2019 from 5% in 2018, we don’t plan to make any material change to our $70 fair value estimate. We view the shares as 10% undervalued, trading at 13 times our 2019 estimate, near the low-double-digit earnings per share growth rate we expect over the next five years.
In our opinion, there were no metrics that warranted imminent concern about Carnival’s ability to drive demand creation or manage its cost structure. Our long-term yield outlook incorporates 2% average yield increases, above the flattish pace the company has been able to capture over the past decade, as we expect that improved revenue-management strategies and systems should lead to structurally higher yield grab than in the past. We have costs rising more than 1% on average, versus the flattish pace they have maintained on an as-reported basis over the past decade, as fuel and foreign exchange can weigh on the overall metric and have real impacts on cash flows. We expect these metrics add a normalized perspective to Carnival’s earnings power, adjusting for the cyclical silo that it operates within.
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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.