We recently downgraded our rating on Carnival Corporation (CCL) from Neutral to Underperform. The rating on the world’s largest cruise operator was downgraded on a host of factors including rising fuel prices, exposure to the sluggish European market and an overall inflationary outlook. Political disturbances in some regions and lower near-term Caribbean pricing will also be headwinds to the company.
In the recently concluded first quarter of 2011, Carnival’s earnings of 19 cents came in line with the Zacks Consensus Estimate but was below the year-ago quarter’s earnings of 22 cents. Although quarterly revenue outperformed the Zacks Consensus Estimate, the gain was more than offset by increased fuel prices and was not reflected in the earnings level.
In the first quarter of 2011, fuel price increased by 9% year over year, a trend which management expects will continue over the year. For second quarter 2011, the company estimates fuel costs to increase by $140 million or 18 cents per share year over year.
The company’s biggest competitor, Royal Caribbean Cruises Ltd. (RCL) managed to weather the rise in fuel prices through an efficient hedging program. Over the last five years, the company reduced the number of gallons of fuel by 15%. The company is 58% hedged for 2011, 55% hedged for 2012 and 30% hedged for 2013.
Coming back to Carnival, net cruise costs, excluding fuel per available lower berth day, are projected to be flat to up 1% for the full year. This guidance is about a half a percentage point higher than the company had forecast in December 2010. The company is also seeing some more inflationary pressures in terms of crew travel, food costs, freight and other areas. Costs other than fuel are estimated to be higher in the range of 2% to 3% in the second quarter of 2011.
Apart from the threat to cost structure, Carnival has reduced it net revenue yield outlook due to route changes resulting from political disturbances in the Middle East and North Africa. As a result of political unrest in that area of the world, there was a considerable drop in demand with the consequent effect on booking volumes and pricing. Management estimates that this disruption could have a negative impact of 5 cents in the fiscal earnings. It now expects net revenue yields guidance to be up 2.5% to 3.5% on a constant dollar basis, down from the earlier projection of up 3% to 4%.
Moreover, the company expects Caribbean pricing to remain stressed in the second quarter of 2011 due to the significant supply increases in that market. However, the impact of the lower Caribbean pricing will be felt to a lesser extent as the quarters pass by due to less capacity additions.
Agreement – Estimate Revisions
Based on the above fundamentals, 9 out of 10 analysts decreased their estimates over the last 7 days, for the upcoming quarter. For fiscal 2011, 6 out of 12 analysts slashed their estimates while 3 upped the same.
Magnitude – Consensus Estimate Trend
During the last 7 days, estimates fell 11 cents and 10 cents for the upcoming quarter and fiscal 2011. The current Zacks Consensus Estimates are 23 cents for the second quarter reflecting a year-over-year decline of 27.19% and $2.62 for fiscal 2011 reflecting a year-over-year growth of 5.32%.
Carnival currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
CARNIVAL CORP (CCL): Free Stock Analysis Report
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