Carnival Earnings Review Q3 2015

  • Despite beating earnings and raising guidance Carnival Cruise Lines stock price fell, offering investors a buying opportunity.
  • Accounting issues, geographic concerns and pricing stability are outstanding concerns.
  • The stock price should react ahead of 2016 guidance in December.

Shares of Carnival Corp (NYSE:CCL) had been sailing ahead of the averages with a 16% year to date return heading into the Carnival earnings announcement for Q3 2015.  This  compares very favorably to a loss of 4.5% for the S&P 500.

CCL stock chart

Source: Carnival stock price data by amigobulls.com

However, Carnival Earnings release highlighted pricing concerns, which overshadowed a $0.17 EPS beat as weakness in Europe and a potential slow-down in China caused traders to sell into strength.  The recent 5.5% drop was unnerving but a closer look at the fundamentals shows that business is continuing to improve and this drop is a buying opportunity rather than an inflection point.  The recent accounting issues will be forgotten when guidance for 2016 is given in December.  Analysts will roll their models forward and investors will look for growing companies (like Carnival) to profit from in a flat market.

A $0.17 beat or a $0.04 headwind?

A 17 cent earnings beat is very impressive but in the current economic climate everything is scrutinized for weakness.  Of the 17 cents of upside, 10 came from an increased yield on existing ships and three from cost savings on fuel.  However, four cents of upside were attributed to the accounting treatment of costs that will reverse in the coming quarter.  While this situation is an accounting headwind, not a long term impact on profitability, it will slightly put pressure on EPS and needed to be taken into account when giving guidance for the coming quarter.

Are China’s economic problems cooling off its emerging cruise industry?

Back in July, analysts had high hopes for China’s growing Cruise industry as a way to soak up excess capacity and offset weakness in Europe.  Jeffries even raised its rating and estimates on July 14th stating that “Very high growth in the Chinese market” should “mean that consensus forecasts are achievable.”  After two months of dramatic stock market volatility and the yuan devaluation, its no surprise that analysts are getting more conservative again.  However, today, China only represents 5% of CCL’s global capacity.  That’s just two ships!  Even if China’s weakness is prolonged, the impact on the company’s financials should be negligible.

Pricing is the key to 2016.

The bulk of Carnival’s profit comes from North America and Europe.  The Caribbean business is growing and the European business is stable despite the economic turmoil.  However, Carnival has been hesitant to raise prices, even in robust regions.  Instead, it is using this strength to try to reduce last minute discounting.  This may seem like splitting hairs but it’s an important distinction.  If Carnival can close more deals earlier in the cycle, the company can advertise competitive rates while improving profitability.  If its tactics are successful, Carnival will see improved profitability without raising prices, keeping both finance and marketing happy!

In December, Carnival will offer guidance for 2016 which should represent  a positive catalyst for the stock.  Yields on its current fleet continue to improve, the Caribbean business continues to grow at a rapid clip, there is the potential for improvement in Europe and exposure to China is limited to 5% of capacity today.  As analysts look for ideas that are working in a flat to down market, Carnival stock represents a source of growth with a 2.3% dividend yield.

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