Carnival Sees Rough Waters Ahead

Carnival (NYSE: CCL) (NYSE: CUK) is kicking off the new trading week with disappointing financial results, sending the stock to fresh 52-week lows on Monday. The world’s largest cruise ship operator posted its fiscal second-quarter results ahead of the market open. The quarter itself was solid, but weak guidance scared investors worried about looming softness and cost controls.

Revenue rose 10.4% to $4.357 billion, just below the 11.6% uptick in the fiscal first quarter that was celebrated as Carnival’s strongest top-line growth since the summer of 2011. Favorable currency translations are padding revenue gains, but we’re still eyeing a better-than-expected showing on a constant currency basis. Revenue yields — revenue per available lower berth day, a key metric in gauging the health of the cruise industry — rose 8.8%, or 4.8% on a constant currency basis. Carnival’s guidance back in March was calling for just a 2.5% to 3.5% gain on a constant currency basis.

Part of the P&O fleet, owned by Carnival. Image source: Carnival.

Maritime forecast

The fiscal second quarter was also solid on the bottom line. Adjusted net income — earnings after backing out unrealized gains and losses on fuel derivatives and other net charges — rose 29.4% to $489 million. The record adjusted net income translates to a profit of $0.68 on a per-share basis.

It’s not cheap to run a cruise line, but Carnival was able to make it work in the quarter. Gross cruise costs including fuel per available lower berth day rose 8.2%, or 3.6% excluding fuel expenses. Carnival’s earlier outlook was calling for net cruise costs excluding fuel to rise between 4% and 5% for the period.

Looking ahead is where the waters get choppy. Advanced bookings for the next three quarters are running at the same pace as last year at higher price points, but rates have started to stabilize since March. Carnival sees net revenue yields rising 3% for the full fiscal year — up from its March guidance of 2.5%. But when you factor in the second-quarter beat, it doesn’t offer a lot of upside for the latter half of the year. It’s holding steady with its net cruise-costs guidance excluding fuel, but changes in fuel prices as well as realized fuel derivatives and currency rates are now expected to lower earnings by $0.19 per share.

Carnival now sees an adjusted profit of $4.15 to $4.25 a share in fiscal 2018, ahead of the $3.82 it rang up last year but short of the $4.20 to $4.40 that it was targeting back in March. Investors weren’t impressed, sending Carnival shares 8% lower on Monday. Its peers also moved lower on the financial results, assuming that what is weighing on the industry leader will also trip them up when they report in the coming weeks.

Carnival is still doing a few things right. Carnival Horizon hit the open waters in March, raising the number of ships on Carnival’s namesake brand to 26. A month later, Seabourn Ovation became the fifth all-suite ship on that luxury line. Carnival ships will also be making 40 calls to Cuba next year, a new port that is bound to generate heavy demand.

Carnival also recently boosted its quarterly dividend by 11% to $0.50 a share, a move that pushes its yield to a hearty 3.4% as of Monday’s close. Along with on-board enhancements like the potentially game-changing wearable Ocean medallions that it started introducing two years ago and the next-gen ships powered by liquefied natural gas being added to its fleet, there are a lot of moving parts at the world’s largest cruise ship operator.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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