Earnings Preview: Carnival

Miami-based Carnival Corporation (CCL), which offers various itineraries to passengers worldwide under the leading cruise brands, is slated to release its fourth quarter and fiscal 2010 earnings on December 21, before the opening bell. The current Zacks Consensus Estimate is 33 cents for the fourth quarter (reflecting a year-over-year growth of 36.9%) and $2.49 for full fiscal 2010 (reflecting a year-over-year growth of 10.96%).

Carnival has outperformed the Zacks Consensus Estimate over the trailing four quarters, with earnings surprises varying in the range of 6.7% to 69.2%. The average earnings surprise was 27. 0%. This implies that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.

Third Quarter Flashback

Carnival’s third quarter 2010 earnings of $1.62 per share comfortably surpassed the Zacks Consensus Estimate of $1.47, buoyed by an increase in net revenue yields, attributable to robust demand in the summer season and the ongoing cost reduction initiatives, which more than offset the hike in fuel prices.

Total revenue spiked 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.

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, slightly below management’s guidance of $493 per metric ton.


For the fourth quarter, Carnival expects net revenue yields to increase 2.5% to 3.5% (decline of 1%–2% on a constant dollar basis) and earnings in the range of 25 cents to 29 cents, down 7 cents from the previous expectation of 32 cents to 36 cents. The reduced earnings guidance is largely due to the Carnival Splendor accident.

For full-year 2010, Carnival raised its earnings guidance range to $2.48–$2.52 from $2.25–$2.35. Net revenue yields on a current dollar basis are expected to increase 1% and 2.5% on a constant dollar basis.

Estimates Revisions Trend

Estimates have moved down in the last 30 days, implying that analysts depict a negative outlook for the upcoming quarter.

Agreement of Analysts

Revision trends in the last 30 days have drifted toward the negative side with no positive change. For the fourth quarter, out of 14 analysts covering the stock, five have lowered their estimates while none moved in the opposite direction. For both fiscal 2010 and 2011, estimates were slashed by 7 and 4 analysts out of 18 analysts, respectively, while none have raised the same.

In the last 7 days, one analyst has raised the estimate and one has trimmed the same for the coming quarter, thus providing no clear direction. For both fiscal 2010 and 2011, 3 analysts decreased their estimates and one analyst increased it.

Negative revisions by the analysts are based on the recent setback that Carnival experienced. A fire broke out in the engine room of the Carnival Splendor, damaging the ship and disrupting voyages, thereby hurting fourth quarter earnings. Moreover, the company expects Caribbean pricing to be lower, particularly in the first quarter of 2011, due to significant supply increases in the market.

For the first quarter of 2011, the industry is likely to increase Caribbean capacity by about 15% while Carnival’s Caribbean fleet is growing only 10%. Additionally, the first quarter of 2011 is expected to be most challenging as 66% of Carnival’s North American fleet is in the Caribbean market during the quarter.

Magnitude of Estimate Revisions

Over the past 30 days, Carnival’s estimates have dropped by 2 cents for the fourth quarter of 2010, fiscal 2010 and fiscal 2011. Currently, the Zacks Consensus Estimates for the fourth quarter, fiscal 2010 and 2011 are a respective 33 cents, $2.49 and $2.93.

Our Take

We expect Carnival’s fourth quarter results to be depressed on account of the Carnival Splendor disaster. The company is also expected to report below the Zacks Consensus Estimate. The Splendor was scheduled to resume services on January 16, 2011, but Carnival recently postponed this to February 20, as the repair work is not yet complete. We believe this will also hurt the first quarter 2011 results.

However, a strong booking momentum and pricing trend along with successful cost-containment efforts will likely pay off, going forward. Moreover, we believe that Carnival’s strong balance sheet with ample cash balance promises above-average long-term growth in an improving economy, marked with slower industry capacity growth and reviving consumer demand.

On the flip side, surging fuel prices, overall economic uncertainty and lower Caribbean pricing due to the significant supply increases in that market will be the company’s near-term headwinds. Hence, the company has a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

Carnival’s strongest competitor Royal Caribbean Cruises Ltd. (RCL) will release its fourth quarter 2010 earnings on January 26, 2011.

CARNIVAL CORP (CCL): Free Stock Analysis Report

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