On June 22, Carnival Corp. (CCL) reported fiscal 2010 second quarter earnings of 32 cents per share, which slightly exceeded the Zacks Consensus Estimate of 30 cents but dipped from the year-earlier earnings by a penny. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short term and long term outlook for the stock.
Earnings Report Review
Net revenue in the quarter spiked 10.3% year over year to $3.2 billion, with net revenue yield at current dollar prices increasing 2.4% from the prior-year quarter, largely due to a favorable foreign exchange rate. On a constant currency basis, net revenue yield upped 2.0% from the prior-year quarter, in line with the upper end of the guidance provided by the company. Carnival’s gross revenue yields increased just 0.4% in current dollars, because of lower air transportation revenues.
(Read our full coverage on this earnings report: Carnival Beats Zacks Estimate)
Earnings Estimate Revisions – Overview
Following the release of Carnival’s second quarter results, estimate revision trends among the analysts depict a negative outlook for the upcoming quarters. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
Over the last 7 days, 8 of the 13 analysts covering the stock made downward earnings estimate revisions for the fiscal 2010 third quarter. A similar downward trend is noticed for both the fourth quarter and fiscal 2010, with estimates having been lowered by 7 and 6 out of 14 and 15 analysts, respectively. On the other hand, upward revisions in estimates were made for the upcoming two quarters and fiscal 2010 by 1, 3 and 2 analysts, respectively.
Over the last 30 days, estimates for Carnival were lowered by most of the analysts, while upward revisions have been fewer. This indicates a negative bias of the analysts on the company.
However, there is no clear directional movement for fiscal 2011 over the last 7 days with 5 out of 19 analysts increasing their estimates, and 5 decreasing the same.
The analysts, by and large, are mainly concerned about the rise in fuel prices. The second quarter 2010 earnings of the company were marred by rising fuel prices year over year. Management expects this trend to continue for the remaining of 2010, costing an additional $440.0 million, or 55 cents per share, thereby driving overall costs up to the range of 1.0% to 2.0% in current currency.
Although the pricing trend is improving for Carnival on the back of a recovery in consumer demand outpacing supply growth, Carnival expects its third quarter pricing to remain flat in Europe due to the 8% increase in capacity for its European branded fleet.
Additionally, the adverse effect of economic uncertainty, fewer guests purchasing their air travel tickets through Carnival owing to lower air transportation revenues, and a greater-than-expected slowdown in the European economies compelled the analysts to slash their estimates.
However, the analysts’ outlook remains comparatively favorable on fiscal 2011 based on higher capacity growth guidance and an expected rebound in economy.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Carnival has been quite significant over the last 7 days. Following the release of second quarter results, estimate for the next quarter has been lowered by 6 cents ($1.46 from $1.52). Carnival’s estimates for fiscal 2010 and fiscal 2011 have been decreased by 2 cents.
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 and theoverall 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.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “CCL”
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