We are reiterating our long-term Neutral recommendation on the largest cruise operator in the world, Carnival Corporation (CCL). The stock also retains a Zacks #3 Rank (Hold rating) over the short term.
Despite soaring fuel prices, greater exposure to the sluggish European market and political turmoil in some geographical regions, we believe Carnival will generate solid profits in the upcoming third quarter of 2011 based on the seasonal cycle.
Historically, demand for cruises has been upbeat during the third fiscal quarter, which includes the Northern Hemisphere summer months. Higher demand in the third quarter leads to increased net revenue yields. Accordingly, the company typically generates the highest earnings at this time of the year.
In addition, substantially most of Holland America Princess Alaska Tours’ revenue and net income are generated from May through September in accordance with the Alaska cruise season. Moreover, management is witnessing strong demand in the North American market, and it anticipates solid yield growth in the second half of 2011 with strong booking and pricing.
We also believe the company’s strong balance sheet and solid cash generation should be accretive and promise above-average long-term growth in an improving economy, marked with slow industry capacity growth and reviving consumer demand.
However, on the flip side, inflation in fuel prices has been a cause of concern for all cruise vacation providers and shipping companies. For third quarter 2011, Carnival 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.
Furthermore, the company reduced it outlook for net revenue yields due to route changes resulting from political disturbances in the Middle East and North Africa and the earthquake in Japan. As a result of political unrest in that area of the world, there was a considerable drop in demand thereby, impacting occupancy and pricing.Management estimates that this disruption could have a negative impact of 20 cents per share on fiscal earnings.
The company is expected to release its third quarter results on October 19, 2011. The Zacks Conesus Estimates for 2011 and 2012 are pegged at $2.44 and $2.93, respectively. Based on the above fundamentals, we expect the stock to perform in line with the market.
