Company Reports

Carnival remains the largest company in the cruise industry, with nine global brands and 92 ships at the end of fiscal 2023. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean prior to the pandemic, a factor which the firm can again utilize to help optimize forward pricing. With an European demand profile that has recently returned to normalized levels, we believe there is ample support for improving economic performance at Carnival.

Shares of narrow-moat Carnival were flat after investors digested first-quarter results and an updated full-year outlook. While the first quarter was a touch better than what both we and consensus (FactSet) had expected, Carnival's amended full-year 2024 EPS forecast for $0.93 (near our $0.90 projection) was below Wall Street's $1.01 estimate. We are not changing our $27.50/GBX 2,160 fair value estimates, and we believe the positives still outweigh the negatives for Carnival. A few key demand factors support our constructive stance on shares. To start, booking volumes closed the first quarter at an all-time high and at higher prices versus 2023. Thus, there is less risk for pricing pressure via bundling over the remainder of the year with little inventory left to sell in 2024. Next, customer deposits have reached $6.6 billion, up more than 20% versus last year, displaying consumers' willingness to commit to Carnival's offerings. Lastly, the firm lifted its full-year as-reported net yield outlook by 100 basis points to 9.5%. Not only does this change include the outperformance in the first quarter, but it also includes a lift in pricing over the remainder of the year from initial expectations.

Carnival remains the largest company in the cruise industry, with nine global brands and 92 ships at the end of fiscal 2023. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean prior to the pandemic, a factor which the firm can again utilize to help optimize forward pricing. With an European demand profile that has recently returned to normalized levels, we belove there is plenty of support for improving economic performance at Carnival.

We are reinstating our narrow moat ratings for Carnival, Royal Caribbean, and Norwegian after taking away the moat designation at the onset of the COVID-19 pandemic. We think the cruise firms capture an economic moat stemming from three sources, including efficient scale, brand intangible asset, and cost advantage. Underlying these sources are factors including barriers to entry, pricing power, and scale advantages that bolster the cruise lines competitive edge. We now forecast ROICs that are even better than the pre-COVID-19 period over our outlook, reaching 18% at Carnival, 17% at Royal, and 13% at Royal at the end of our 10-year forecast versus sub-10% in 2019 (when the firm last held a narrow moat rating) and our 10% weighted average cost of capital estimate.

Carnival remains the largest company in the cruise industry, with nine global brands and 92 ships at the end of fiscal 2023. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and the Mediterranean prior to the pandemic, a factor which the firm can again utilize to help optimize forward pricing. With a European demand profile that has recently returned to normalized levels, we believe there is plenty of support for improving economic performance at Carnival.

The consumer’s appetite to travel has yet to abate, as indicated by Carnival’s fourth-quarter results and 2024 outlook. In the fourth quarter, net yields were up 6% versus 2019 on an as-reported basis, occupancy was back above 100%, and the firm carried 3.1 million passengers on holiday (up 7% from 2019). More importantly, it seems momentum in consumer interest isn’t set to slow any time soon. For 2024, Carnival has offered an outlook for net yield growth of 8.5%, above the 6% we had forecast, and the highest growth rate the company has seen since 2004. With two thirds of capacity already booked for the year ahead, we see little risk to pricing growth expectations in the near term, as consumers are still booking farther out than in the past, leaving a whopping $6.4 billion in customer deposits on hand. All components are currently aiding growth (ticket, on board, occupancy gains), and both North American and European consumers are showing up strong. The 2024 cost outlook was in line with our 4.4% increase excluding fuel, which is higher than optimal growth but is impacted by 586 drydock days and modest inflationary pressures (together around 4%).

Carnival remains the largest company in the cruise industry, with nine global brands and more than 90 ships at the end of fiscal 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean prior to the pandemic, a factor that the firm could finally utilize again to help optimize forward pricing. With a Europen demand profile that has recently returned to normalized levels, we belive there is plenty of support for improving economic performance at Carnival.

No-moat Carnival announced its first positive earnings report since 2020's first quarter. By all accounts, third-quarter results indicate that consumers have yet to pull back on travel, with the firm noting the cumulative advance-booked position for 2024 is above the high end of the historical range at higher prices than 2023. Moreover, booking volumes in the period were around 20% above 2019 levels, helped by Europe demand that has finally returned to prepandemic patterns. Along with the $6.3 billion Carnival has in customer deposits, all signals indicate cruising is resonating with consumers. Shares have traded flat since the announcement as we believe strong third-quarter results (as reported net per day 4% over 2019 levels, adjusted EBITDA of $2.2 billion, and adjusted EPS of $0.86) were offset by a fourth-quarter outlook that included EBITDA a bit below consensus expectations (FactSet) at $800 million-$900 million. In total, the full-year outlook for adjusted EBITDA of $4.1 billion-$4.2 billion was in line with the forecast underlying our $22 (GBX 1,740) fair value estimate.

Carnival remains the largest company in the cruise industry, with nine global brands and more than 90 ships at the end of fiscal 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, prior to the pandemic, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international demand has lagged domestic demand since cruising has resumed, a trend that could take some time to normalize and could challenge the economic performance of Carnival over the medium term.

Although no-moat Carnival delivered second-quarter results that were ahead of both company and our expectations and lifted its full-year outlook, a slower-than-expected reduction in expenses sent shares tumbling more than 10%. We surmise concern surrounds an increase in advertising spending, which could imply consumers need motivation to book. In contrast, we see higher incentive compensation (retaining talent) and a slower decline in inflation as cost inputs that are largely out of management's control. Net cruise costs excluding fuel jumped 12%, much faster than the 8%-9% guidance and our 8% estimate. With the full-year cost minus fuel set to rise 8%-9% (up from 6.5%-7.5% prior), the march to full-year profitability remains elusive in 2023. This overshadowed reported second-quarter net per diems that rose 5%, handily outpacing company guidance of 0%-1% and the 1% we had forecast.

Carnival remains the largest company in the cruise industry, with nine global brands and more than 90 ships at the end of fiscal 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, prior to the pandemic, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international travel has lacked consistency as a result of COVID-19, a trend that could be lumpy depending on consumer behavior, which would challenge the economic performance of Carnival over an extended horizon.

Carnival’s profitability is trending in the right direction as the appetite for travel persists. The key booking season (Wave) has proved fruitful despite some economic softness, with Carnival noting it had the highest booking volumes for any quarter in its history across both its geographic segments. This resulted in a massive cash haul, with customer deposits reaching $5.7 billion in the first quarter, well above the $4.9 billion balance at the end of November. In our opinion, this indicates the willingness of customers to commit in advance given a pent-up demand for travel, and Carnival confirmed the booking curve has lengthened in recent periods. First-quarter yields (pricing per diem) were just 8.5% below the same period in 2019. This pricing gap is set to close ahead, with flat net yields in the second quarter of 2023 expected, which implies a healthy pricing set up for the back half of 2023. If Carnival can capture 1%-2% net yield improvement over 2019 in 2023, the second half would imply mid-single-digit growth over prepandemic levels.

Carnival remains the largest company in the cruise industry, with nine global brands and more than 90 ships at the end of fiscal 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, prior to the pandemic, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international travel has lacked consistency as a result of COVID-19, which could spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon.

For no-moat Carnival, demand signals remain positive, as indicated by customer deposits of $5.1 billion (up from $4.8 billion last quarter) and cumulative advanced booking volumes that are above historical averages at higher prices (constant currency) relative to 2019. Spending patterns continue to imply consumers are willing to allocate disposable personal income to services over goods, with average services spend rising nearly 4% over the last five months, while goods spend has declined roughly 1%. This behavior positions Carnival well ahead of wave season, where significant bookings will be undertaken to attempt a return to positive EPS in 2023. We don’t plan any material change to our $22 (GBX 1,970) fair value estimate as we nudge our 2023 expenses closer to Carnival’s net cruise cost ex-fuel guidance of 5%-6% (our preprint estimate was 7.6%) and view shares as attractive.

Despite enduring travel demand into the fall of 2022 and our view that it can continue into 2023, investor concerns around future trips and credit availability have grounded share price performance across the industry. As a result, we see meaningful opportunities to book investment stays in Sabre, Accor, Booking Holdings, and Norwegian, which trade at 64%, 42%, 44%, and 54% discounts to our $15, EUR 37.50, $2,900, and $28 fair value estimates, respectively.

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships as of October 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in years prior to the coronavirus pandemic, the repositioning and deployment of ships to faster-growing and under-represented regions like the Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, global travel has waned as a result of COVID-19, which could spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon.

No-moat Carnival reported worse-than-expected fiscal third-quarter results, delivering adjusted EBITDA of just $300 million, well below the more than $1 billion we had forecast. Although 95% of the fleet was deployed and occupancy was 84%, Carnival remained plagued by higher costs related to COVID-19 protocols and near-term pricing pressures as it continues to book a higher proportion of close-in itineraries and digest future cruise credits. Moreover, the firm’s fourth-quarter outlook for around breakeven EBITDA is significantly lower than the $570 million we had forecast. We believe the slower trajectory to restored profitability is the primary culprit behind the shares tumbling nearly 20% on the day of the release. However, we think concerns about a return to consistent profitability should alleviate in 2023, given that cumulative advance bookings and pricing (normalized for FCCs) are already above 2019 levels. This should permit our 2023 EBITDA outlook to approach 2019 (prepandemic) levels again.

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships at 2021 fiscal year-end. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon.

We don’t plan any material change to our $25 (GBX 1,890) fair value estimate for no-moat Carnival after incorporating second-quarter results into our model and view shares as undervalued even after a roughly 10% post-print pop. While quarterly revenue of $2.4 billion and an EPS loss of $1.61 were a bit lower than our projections, the firm’s outlook for the remainder of the year remained positive (on trend with our outlook). Sales were split about equally between ticket and onboard, with bundled packaging remaining popular, indicating the willingness to partake in offerings while sailing. On the cost side, fuel spend weighed on expenses, up nearly 30% over the same period in 2019, while service costs on its $35 billion in debt continue to run at $1.6 billion annually.

Amid continued concerns about inflation and the global geopolitical environment, the stock prices of the no-moat cruise majors we cover have struggled to stabilize in 2022, with the shares of Carnival falling 29%, Royal Caribbean down 20%, and Norwegian Cruise Line sliding 22% year to date through May 13. We contend that the market is underestimating pent-up consumer demand for travel, with COVID-19-related restrictions receding around the globe. More important, with most (or all) of these operators’ ships deployed, we don’t see liquidity concerns as paramount any longer, as cash burn slows and profitability approaches.