Earnings Preview: Carnival

Miami-based Carnival Corporation (CCL), the world’s biggest cruise-line operator, is slated to release its first quarter fiscal 2011 earnings results on March 22. Carnival expects first quarter 2011 earnings of 19 cents per share, which is in line with the Zacks Consensus Estimate and is at the higher end of the company’s forecast of 15 cents to 19 cents. In the first quarter of 2010, adjusted earnings were 12 cents per share and including the impact of a non-recurring item of 10 cents, reported earnings were 22 cents per share.

Carnival has outperformed the Zacks Consensus Estimate thrice and missed once over the trailing four quarters, with earnings surprises varying in the range of negative 3.12% to positive 69.23%. The average earnings surprise being 21.26%. This implies that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.

Fourth Quarter Flashback

Carnival’s fourth quarter 2010 earnings of 31 cents per share comfortably surpassed the Zacks Consensus Estimate of 24 cents, buoyed by an increase in net revenue yields and the ongoing cost reduction initiatives, which more than offset the hike in fuel prices. The results fared better despite the recently-announced voyage disruptions, which reduced earnings by 7 cents per share.

Total revenue spiked 6.6% year over year to $3.5 billion and was ahead of the Zacks Consensus Estimate of $3.36 billion. On a constant currency basis, net revenue yields rose 3.9% from the prior-year quarter versus management’s guided range of 2.5% to 3.5%. Gross revenue yields increased 1.5% at constant currency.

Net cruise costs, including fuel and voyage disruptions, fell 1.1% from the year-ago level on a constant dollar basis. Fuel price of $488 per metric ton was up 6.0% year over year, a slight increase from management’s guidance of $479 per metric ton.

Estimates Revisions Trend

Estimates have moved down in the last 30 and 7 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 first quarter, out of the 8 analysts covering the stock, one has lowered its estimate while none moved in the opposite direction. For both fiscal 2011 and 2012, estimates were slashed by 7 and 10 analysts, respectively, while none have raised the same.

In the last 7 days, one analyst has lifted its estimate and one has trimmed the same for the upcoming quarter, thus providing no clear direction. For both fiscal 2011 and 2012, 6 and 7 analysts, respectively, have decreased their estimates while none increased their estimates.

Negative revisions by the analysts are based on management’s reduced fiscal 2011 earnings outlook in the range of $2.50 to $2.60 from $2.90 to $3.10 driven by higher fuel prices and route changes resulting from disturbances in the Middle East and North Africa. The guidance has been lowered by 40 cents due to rising fuel prices and an additional 5 cents for direction changes in the Middle East and North Africa.

Since the company provided its guidance in December, there has been an upward rally in crude oil prices due to the political unrest in Libya, Egypt, Tunisia, Yemen and Bahrain. Oil prices are rising at double-digit rates and hike in fuel prices is a cause of concern for all cruise vacation providers and shipping companies.

Magnitude of Estimate Revisions

Over the past 30 days, Carnival’s estimates have dropped by 31 cents for fiscal 2011and by 19 cents for fiscal 2012, but remains in line for the first quarter. In the last 7 days, Carnival’s estimates have been trimmed by 23 cents and 11 cents for 2011 and 2012, respectively. However, first quarter 2011 earnings estimates were above the Zacks Consensus Estimate by a penny over the last 7 days. Currently, the Zacks Consensus Estimates for the first quarter, fiscal 2011 and 2012 are pegged at 19 cents, $2.69 and $3.38, respectively.

Our Take

Presently, surging fuel prices remains the company’s biggest headwind. Moreover, Carnival does not hedge its exposure to rising fuel costs and more than half of its revenues come from passengers outside the U.S. As a result, the company’s result will be more negatively impacted by fluctuation in fuel expenses and currency exchange rates.

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 by slower industry-capacity growth and reviving consumer demand.

Hence, the company has a Zacks #4 Rank, which implies a short-term Sell rating on the stock. We also reiterate our long-term Neutral rating.

Carnival’s strongest competitor Royal Caribbean Cruises Ltd. (RCL) is expected to release its first quarter 2011 earnings on April 26, 2011.

CARNIVAL CORP (CCL): Free Stock Analysis Report

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