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Carnival Cruises Toward Mediocrity
Leading cruise line operator Carnival Corp. (NYSE:CCL) (NYSE:CUK) reported second quarter results on Tuesday that demonstrated booking trends are improving after a couple of down years. However, profits continue to be buffeted by volatile fuel costs and its ships continue to be expensive to run and build. As a result, another firm operating on its decks may be a smarter industry play.
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Second-Quarter Sales and Profit Trends
Total revenues increased 8.4% to $3.2 billion, as passenger ticket sales, which constitute the vast majority of the total top line at 76%, increased 8.3%. Carnival also makes money through on-board sales of alcohol and entertainment. This category increased 9.5% while touring sales fell slightly and accounted for less than 1% of the total.
Net revenue yields, an industry measure of passenger capacity, increased a modest 2% and hit the high-end of management's expectations, but was primarily attributed to positive foreign exchange movements. On a constant-dollar basis, yields grew only 0.4% and hit positive levels for the first time since 2008.
A 71.1% jump in fuel costs was the primary culprit for reducing operating income 1.1% to $349 million. Higher interest expense sent net income down 4.5% to $252 million, or 32 cents per diluted share. This matched analyst profit expectations for the quarter.
Guidance
Carnival remained cautious in its sales guidance and expects net revenue yields to grow a couple of percent for the full year. Fuel costs are projected to moderate, but currency benefits should reverse. As a result, earnings should come in between $2.25-2.35 per diluted share and rise 4.9% from last year's $2.24 per share, if Carnival can hit the high end of its guidance.
Alternatives
Arch rival Royal Caribbean (NYSE:RCL) has pursued a similar strategy, as have smaller operators, including Walt Disney (NYSE:DIS) that will double its fleet of two Disney Cruise Line ships by 2012. Yet despite the appealing sales growth prospects, returns on invested capital are quite low given building ships is very capital intensive and requires a fair amount of debt to fund construction costs.
A better bet is Steiner Leisure (Nasdaq:STNR), which provides spa services on cruise ships and boasts returns on invested capital in the double digits. Steiner's business requires less capital to run and isn't subject to fuel price volatility, though it is still dependent on booking trends.
The Bottom Line
Carnival didn't provide a cash flow statement, but should continue to spend most of the operating cash flow it generates on growing and maintaining its fleet of 96 cruise ships. 11 new ships will enter service between now and 2014, and will continue a long-term trend of additional industry capacity. (Learn about cruise ship savings, see: 3 Money-Saving Cruise Ship Tips)
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Second-Quarter Sales and Profit Trends
Total revenues increased 8.4% to $3.2 billion, as passenger ticket sales, which constitute the vast majority of the total top line at 76%, increased 8.3%. Carnival also makes money through on-board sales of alcohol and entertainment. This category increased 9.5% while touring sales fell slightly and accounted for less than 1% of the total.
Net revenue yields, an industry measure of passenger capacity, increased a modest 2% and hit the high-end of management's expectations, but was primarily attributed to positive foreign exchange movements. On a constant-dollar basis, yields grew only 0.4% and hit positive levels for the first time since 2008.
A 71.1% jump in fuel costs was the primary culprit for reducing operating income 1.1% to $349 million. Higher interest expense sent net income down 4.5% to $252 million, or 32 cents per diluted share. This matched analyst profit expectations for the quarter.
Carnival remained cautious in its sales guidance and expects net revenue yields to grow a couple of percent for the full year. Fuel costs are projected to moderate, but currency benefits should reverse. As a result, earnings should come in between $2.25-2.35 per diluted share and rise 4.9% from last year's $2.24 per share, if Carnival can hit the high end of its guidance.
Alternatives
Arch rival Royal Caribbean (NYSE:RCL) has pursued a similar strategy, as have smaller operators, including Walt Disney (NYSE:DIS) that will double its fleet of two Disney Cruise Line ships by 2012. Yet despite the appealing sales growth prospects, returns on invested capital are quite low given building ships is very capital intensive and requires a fair amount of debt to fund construction costs.
A better bet is Steiner Leisure (Nasdaq:STNR), which provides spa services on cruise ships and boasts returns on invested capital in the double digits. Steiner's business requires less capital to run and isn't subject to fuel price volatility, though it is still dependent on booking trends.
The Bottom Line
Carnival didn't provide a cash flow statement, but should continue to spend most of the operating cash flow it generates on growing and maintaining its fleet of 96 cruise ships. 11 new ships will enter service between now and 2014, and will continue a long-term trend of additional industry capacity. (Learn about cruise ship savings, see: 3 Money-Saving Cruise Ship Tips)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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