Coronavirus Could Take a Bite Out of Carnival's Results

With the spread of the coronavirus failing to abate, narrow-moat Carnival (CCL) has updated the financial impact that it expects to its business. In its 10-K, the company noted nine canceled cruises through Feb. 4, when Carnival anticipated a $0.03-$0.04 earnings per share impact. It further noted that had China cruises been canceled through the end of February, it would cost the firm another $0.05-$0.06 per share (totaling about a dime for all of February). However, now that the spread of the virus has permeated other countries in Asia, cancellations are occurring outside of China. Carnival has offered that if it ceased operations in Asia until the end of April, this would act as a $0.55-$0.65 drag to 2020 EPS, leading to a potential 10% decline in year-over-year 2020 EPS. This was based on inaugural guidance of $4.30-$4.60 in EPS (and our $4.57 estimate).

If we alter our model to incorporate the full effect of cancellations in Asia through April, our $58 fair value estimate fails to change materially, when we assume 2021 returns to the same yields and costs per diem as prior to the update. We remind investors not to hit the panic button, as in the year following SARS (the next year was 2004), H1N1 (2010), and Zika (2017), Carnival and Royal both posted positive as-reported yield growth, conveying the resilience of demand across the industry. We also assume that if the coronavirus continues on a protracted path, Carnival will begin to redeploy its hardware to attempt to capture some positive economics off of the currently waylaid fleet. We plan no change to our long-term outlook for Carnival, which incorporates 1.8% average yield and 0.7% average cost growth in 2021 and beyond. This ultimately drives 31% terminal EBITDA margins at the business.