Miami-based cruise company Carnival Corp. (CCL) rose around 3% after it reported better-than-expected fiscal third-quarter 2014 results. The company’s strong guidance for fiscal 2014 boosted investors’ confidence.
The company’s adjusted earnings of $1.58 per share surpassed the Zacks Consensus Estimate of $1.43 as well as management’s guidance range of $1.38–$1.44 per share.
Further, quarterly earnings were higher than the year-ago quarter figure of $1.38 per share. Higher revenues, better-than-expected revenue yields and lower-than-anticipated cruise costs drove the year-over-year rise in earnings.
Third-quarter earnings excluded net unrealized gains on fuel derivatives.
Total revenue in the quarter rose 4.7% year over year to $4.94 billion. Also, revenues beat the Zacks Consensus Estimate of $4.88 billion by 1.2%. Revenues in the quarter benefitted from higher in cruise sales and onboard spending.
However, net revenue yields (in constant currency) increased 1.8% year over year in the reported quarter, compared with the company's guidance of net revenue yield (in constant dollar) remaining flat to down 1%. Gross revenue yields (in current dollars) also increased 2.5%.
Segment Revenues
Carnival earns revenues from its Passenger Tickets business, Onboard and Other as well as Tour and Other segments.
Passenger Tickets: Passenger Tickets revenues in the quarter increased 3.4% year over year to $3.7 billion.
Onboard and Other: Onboard and Other revenues were $1.1 billion, up 9.8% year over year.
Tour and Other: Revenues increased 2.1% year over year to $144.0 million.
Income & Expenses
Operating income was $1.3 billion in the reported quarter, up 36.4% year over year as a result of higher revenues.
Net cruise costs (in constant dollar) per available lower berth day (ALBD) (fuel and impairments excluded) increased 0.5%, better than the company’s June guidance of up 1–2%, due to the timing of certain expenses. Gross cruise costs, including fuel per ALBD in current dollars, decreased 5.8%.
Carnival’s ships have been facing one accident on top of another, significantly affecting its performance. In order to recover, the company has undertaken a series of initiatives. Although these initiatives have pressured the company’s profit — raising its costs at the current level — these are expected to prove beneficial over the long term.
Fuel price was $650 per metric ton in the quarter, down 3.5% year over year, while fuel consumption declined 3% year over year. However, fuel costs were higher than the company’s June guidance of $673 per metric ton.
Fourth-Quarter 2014 Guidance
Carnival expects net revenue yield (in constant dollar) in the fourth quarter to be up 1.5% to 2.5% compared with the year-ago quarter. Net cruise costs per ALBD, excluding fuel, are expected to be down 1–2% on a constant dollar basis from the prior-year quarter.
Based on the above factors, the company expects adjusted earnings for the fourth quarter 2014 in the range of 15 to 19 cents per share, versus 2013 adjusted earnings of 4 cents.
Full-Year Fiscal 2014 Guidance
Based on the strength of third-quarter net revenue yields and present booking trends, Carnival expects net revenue yield (in constant dollar) to remain flat year over year, better than the prior guidance of its being marginally down. Net cruise costs per ALBD (in constant dollar), excluding fuel, are projected to increase slightly.
Based on higher costs and flat revenue yields, the company expects its bottom line in the range $1.84–$1.88 per share in 2014, better than both June guidance of $1.60 to $1.75 and 2013 non-GAAP diluted earnings per share of $1.58.
Full-Year Fiscal 2015 Guidance
For fiscal 2015, net cruise costs per ALBD, excluding fuel are expected to increase about 3% mainly due to a considerably higher level of dry-dock days scheduled next year to install new air emissions technology as well as other technology designed to improve fuel efficiency.
Carnival expects to install the exhaust gas cleaning system or scrubber technology on approximately 70% of its fleet by 2016, thus moving a step closer to meet the 2015 stricter air emission regulations as well as mitigating escalating fuel costs that will result from the new requirements.
The company anticipates the new regulations to result in higher fuel costs in 2015 of approximately 10 cents per share. However, this increase is expected to be gradually reduced by half in 2016 and mostly offset in 2017 based on the system roll out. Also, in 2016, the company will revert back to a more normalized dry-dock schedule, which will counterbalance around half of the increase in 2015 net cruise costs excluding fuel.
Our Take
We believe Carnival’s turnaround remains on track. The company’s several brand-building efforts and other marketing promotions are expected to be beneficial. Carnival recently partnered Dr. Seuss Enterprises to provide a variety of exciting and immersive dining and entertainment experiences on its fleet of 24 "Fun Ships” as part of its brand-building efforts.
Reduction in fuel consumption is another bright spot in Carnival’s report card. However, higher operating costs remain a major headwind for the Zacks Rank #2 (Buy) company.
Some other stocks in the leisure and recreational industry that can be considered include HomeAway, Inc. (AWAY), Royal Caribbean Cruises Ltd. (RCL) and Diamond Resorts International, Inc. (DRII). All these stocks sport a Zacks Rank #2.
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