We are downgrading our rating on Carnival Corporation (CCL), the largest cruise operator in the world, to Neutral from Outperform.
The rating downgrade is based on surging fuel prices, a greater exposure to the sluggish European market and overall economic uncertainty, given that these will prove to be headwinds for the company going forward. Additionally, the company experienced a recent set back as a fire broke out in the engine room of the Carnival Splendor, negatively impacting fourth quarter earnings.
Carnival estimates that the total impact from voyage disruptions and related repair costs will negatively impact fourth quarter earnings by 7 cents. We believe that this will bring the adjusted fourth quarter guidance in the 25 cents to 29 cents range from 32 cents to 36 cents range.
The ship is scheduled to re-enter service on January 16, 2011. The company will also refund affected guests’ cruise fares and air transportation and will also give them a 25% discount on a future cruise.
Moreover, the company expects Caribbean pricing to be lower in the first quarter of 2011, due to the significant supply increases in that market. In the first quarter of 2011, the industry is growing Caribbean capacity by about 15% while Carnival’s Caribbean fleet is growing 10%.
Thus, first quarter 2011 is expected to be most challenging as 66% of Carnival’s North American fleet is in that market. The company’s most important competitor is Royal Caribbean Cruises Ltd (RCL).
The Zacks Consensus Estimates, in the last 30 days, for the fourth quarter of 2010, fiscal 2010 and 2011 were also reduced by a penny to 34 cents, $2.50 and $2.95, respectively, due to voyage disruptions and a lower Caribbean pricing.
However, we remain positive on the stock as the company reported third quarter 2010 earnings, ahead of the Zacks Consensus Estimate, primarily driven by better-than-expected net revenue yields, robust demand in the summer season and ongoing cost reduction initiatives.
We are also encouraged by the company’s strong booking and pricing trend and successful cost-containment efforts, resulting in an increased fiscal 2010 outlook. A strong balance sheet and solid cash generation will likely position Carnival well and promise above-average, long-term growth in an improving economy, marked with a slower industry capacity growth and reviving consumer demand.
CARNIVAL CORP (CCL): Free Stock Analysis Report
ROYAL CARIBBEAN (RCL): Free Stock Analysis Report
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