We recently downgraded our rating on Carnival Corporation (CCL) from Neutral to Underperform.
This was due to a host of factors, including political disturbances in some geographical areas, the earthquake in Japan, rising fuel prices and a greater exposure to the sluggish European market.
In the recently concluded second quarter of 2011, Carnival’s earnings of 26 cents surpassed the Zacks Consensus Estimate but fell below the year-ago quarter’s 22 cents. Although quarterly revenue outperformed the Zacks Consensus Estimate, the gain was more than offset by higher fuel prices.
In the second quarter of 2011, fuel price increased 35% year over year, a trend that management expects will continue through the year. For the third quarter 2011, the company estimates fuel costs to increase by $170 million or 21 cents per share year over year. Additionally, Carnival does not hedge its exposure to rising fuel costs unlike its biggest competitor, Royal Caribbean Cruises Ltd. (RCL), which further adds to the uncertainty.
Carnival has also reduced its net revenue yield outlook due to route changes resulting from political disturbances in the Middle East and North Africa (MENA) and the earthquake in Japan. The geopolitical disturbances led to a considerable drop in demand with the consequent effect on occupancy and pricing.
Management estimates that this disruption could have a negative impact of 20 cents on fiscal earnings. The company now expects net revenue yields guidance in the 1.5% to 2.5% range on a constant dollar basis, down from the earlier projection of 2.5% to 3.5%.
Moreover, Carnival estimates lower yields for the Europe, Australia and Asia (EAA) brands in the second half of 2011, due to route changes of almost 300 itineraries. To boost demand in the European region, the company had to lower its price significantly for the redesigned MENA cruises. The Southern Europe brands were mostly affected as almost 40% of deployment changes were related to these regions.
European brand bookings, excluding MENA itineraries, were also hurt by weak economies in the main markets like France, Italy and Spain. Additionally, a significant increase in Mediterranean capacity this year by European and US cruise companies also contributed to the deterioration in European pricing.
Agreement – Estimate Revisions
Based on the above fundamentals, ten out of 12 analysts decreased their estimates over the last 30 days for the upcoming quarter. For fiscal 2011 and 2012, thirteen out of 16 analysts and 9 out of 17 analysts, respectively, slashed their estimates. However, one analyst has raised his estimates for the third quarter, fiscal 2011 and 2012.
Magnitude – Consensus Estimate Trend
During the last 30 days, estimates fell by 16 cents for the upcoming quarter and by 13 cents for fiscal 2011 and fiscal 2012 each. The current Zacks Consensus Estimate for the third quarter is $1.64 per share, reflecting a year-over-year decline of 0.76%. For fiscal 2011, the Zacks Consensus Estimate is pegged at $2.45, reflecting a year-over-year plunge of 1.53%. However, the Zacks Consensus Estimate of $2.45 for 2012 reflects a year-over-year growth of 22.38%.
Carnival currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
