Earnings Scorecard: Carnival Corp.

Carnival Corporation (CCL), the world’s largest cruise company, posted better-than-expected third quarter 2010 results on September 21, 2010, buoyed by an increase in net revenue yields, attributable to robust demand in summer season and the ongoing cost reduction initiatives, which more than offset the hike in fuel prices. The recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.

Earnings Report Review

During the third quarter of 2010, Carnival reported earnings of $1.62, ahead of the Zacks Consensus Estimate of $1.47 and the year-ago quarter’s $1.33. Earnings for the quarter also exceeded management’s guidance of $1.43 to $1.47 per share.

Total revenue spiked up 7% year over year to $4.43 billion, in line with the Zacks Consensus Estimate. Net revenue yields increased 2.5% from the prior-year quarter, largely attributable to a favorable foreign exchange rate. On a constant currency basis, net revenue yields rose 6.2% from the prior-year quarter versus management’s guidance of up 5% to 6%. Gross revenue yields increased 1.2% in current dollars, driven by lower air transportation revenues.

Net cruise costs, including fuel, inched up 0.6% from the year-ago level on a constant dollar basis. Fuel price of $473 per metric ton was up 17% year over year, a slight decrease from management’s guidance of $493 per metric ton.

(Read our full coverage on this earnings report: Carnival Beats, Outlook Raised)

Earnings Estimate Revisions – Overview

Following the release of Carnival’s third quarter results, estimate revision trends among the analysts depict a positive outlook for the upcoming quarters. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

From the table below, a positive inclination can be witnessed among the analysts, who mostly remain bullish on Carnival’s optimistic outlook. Revision trends in the last 7 days drifted toward the positive side. For fiscal 2010, 10 out of 18 analysts covering the stock raised their estimates and for fiscal 2011, 10 out of 17 analysts have increased their estimates. None of the analysts have decreased their estimates.

The analysts have increased their estimates to reflect improved cost containment initiatives, strong booking, favorable changes in exchange rate and decline in fuel prices, as a result of which the company has also raised its outlook for 2010. Additionally, pricing is expected to rise, fueled by the resurgence in consumer demand, outpacing supply growth. Moreover, free cash flow is expected to accelerate from 2011 due to a slowdown in capacity, triggering a strong potential for dividend increase.

However, for fourth quarter 2010 and first quarter 2011, over the last 7 days, 2 analysts have decreased their estimates as Caribbean operating environment is expected to be extremely competitive as a result of significant increases in industry-wide capacity, thus resulting in decline in prices. The first quarter of 2011 is expected to see the biggest impact from the weak Caribbean pricing, given that 66% of Carnival’s North American fleet is expected in that market.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Carnival has been quite significant over the last 7 days. Following the release of third quarter results, estimates for fiscal 2010 and fiscal 2011 have increased by 9 cents and 7 cents to $2.44 and $2.83, respectively.

For the fourth quarter of 2010, estimates have dropped by 1 cent to 34 cents per share over the last 7 days. However, the decline of 6 cents dragged first quarter 2011 estimate to 24 cents and it is much higher than expected, considering that the quarter is expected to remain most challenging due to lower Caribbean pricing.

Our Recommendation

We believe Carnival will experience a strong booking and pricing trend, going forward. Its successful cost-containment efforts, strong balance sheet and a commendable debt-equity ratio, along with ample cash balance promise above-average long-term growth in an improving economy, marked with slower industry capacity growth and reviving consumer demand.

However, surging fuel prices, a greater exposure to sluggish European markets, lower Caribbean prices in the first half of 2011 and the overall economic uncertainty will likely hurt Carnival’s growth in the near term. Hence, we maintain a Neutral recommendation on the shares of Carnival, with a Zacks #3 rank, which translates into a short-term Hold rating.

CARNIVAL CORP (CCL): Free Stock Analysis Report

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