Carnival Beats Q2 Estimates (CCL) (RCL)

Carnival Corporation (CCL) reported second quarter 2011 earnings of 26 cents per share, surpassing the Zacks Consensus Estimate of 22 cents but deteriorating from 32 cents earned in the year-ago quarter.

While the earnings were aided by better-than-expected net revenue yields in North America brands, persistent hikes in fuel prices, geo-political turmoil and the disaster in Japan were the dampeners. Moreover, bookings were soft in U.K. and Southern Europe. However, earnings also exceeded management's guided range of 20 cents to 24 cents per share.

Carnival’s second quarter total revenue increased 10.8% from the prior-year quarter to $3.6 billion, beating the Zacks Consensus Estimate of $3.5 billion. On a constant currency basis, net revenue yields rose 2.3% from the prior-year quarter and were in line with management’s guidance range of 1.5% to 2.5%. Gross revenue yields rose 5.8% at current dollars.

Net cruise costs, excluding fuel per available lower berth day (ALBD), were up 2.7% year over year on a constant dollar basis. Fuel price of $673 per metric ton was up 35.0% year over year, reflecting an increase from management’s guidance of $659 per metric ton.

Segment Revenue

Passenger Tickets: Revenue from Passenger Tickets increased to $2,778.0 million from $2,499.0 million in the second quarter of 2010.

Onboard and Other: Revenue from Onboard and Other increased to $817.0 million in the second quarter from $737.0 million in the prior-year quarter.

Tour and Other: Revenue from the Tour and Other segment fell to $25 million in the second quarter from $31 million in the year-ago quarter.

Financial Position

At quarter end, the company had cash and cash equivalents of $557 million, long-term debt of $8.7 billion and shareholder equity of $23.9 billion.

Third Quarter 2011 Guidance

Management expects net revenue yield on a constant dollar basis to increase 1.0% to 2.0%. Net cruise costs per ALBD, excluding fuel are expected to be up 2.5% to 3.5%. Based on current fuel prices and currency exchange rates, the company expects fully diluted earnings for the quarter in the range of $1.60 to $1.64 per share.

Full Year 2011 Guidance

Carnival Corporation expects net revenue yield to increase 1.5% to 2.5% on a constant dollar basis, down from the earlier projection of up 2.5% to 3.5%. The company has reduced its projection due to route changes resulting from disturbances in the Middle East and North Africa. However, net revenue yield on a current dollar basis is expected to increase from 4.0% to 5.0% (down from the earlier projection of 4.5% to 5.5%).

Net cruise costs per ALBD, excluding fuel, are projected to be flat to up 1.0% on a constant dollar basis.

Fuel expenses are estimated at $639.0 per metric ton. Based on the current spot prices, fuel costs are expected to increase $515 million year over year, costing an incremental 65 cents per share.

Carnival anticipates its earnings in the range of $2.40 to $2.50 per share.

Our Take

We believe that Carnival will be able to reap more profits in the ongoing third quarter. Historically, demand for cruises has been the greatest during the third fiscal quarter, which includes the Northern Hemisphere summer months. Higher demand during the third quarter leads to increased net revenue yield. 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 is generated from May through September in accordance with the Alaska cruise season.

On the flip side, inflation in fuel prices remains a cause of concern for Carnival. Furthermore, route changes in almost 300 itineraries resulting from political disturbances in the Middle East and North Africa as well as lingering effects of the earthquake and tsunami in Japan will remain the depressing factor in Carnival’s earnings growth. Because of these disruptions, there was a considerable drop in demand with consequent effects on booking volumes and pricing.

One of Carnival’s primary competitors, Royal Caribbean Cruises Ltd. (RCL), during its first quarter results, also cut down its fiscal 2011 earnings estimate to $3.10–$3.30 from the earlier projection of $3.25 to $3.45 due to the same geopolitical issues.

Carnival currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.