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Carnival Needs A Profit Wave
Carnival (NYSE:CCL) (NYSE:CUK) rules the seas as the largest cruise company and one of the largest vacation companies in the world. It has done an enviable job of holding sales steady during the global recession, and appears to be seeing a robust recovery in current booking trends, which it detailed during its third-quarter financial release on Tuesday. It remains to be seen if profit growth, which has been nonexistent for some time, will return.
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Third-Quarter Sales Review
Total revenues increased 7% to $4.4 billion, as passenger ticket sales, which accounted for the vast majority of sales at 76.3%, jumped 8.8%. Sales of items while passengers are on board grew 2.7% to 19.1% of sales, while tour and related revenue fell slightly to account for the rest of the quarterly top line.
Net revenue yields, a standard industry measure to gauge passenger capacity and profitability, grew a healthy 6.2% and were ahead of the company's own expectations. Management cited particular strength in the core North American market and decent European trends that faced an 8% increase in capacity. Overall, consumers booked more cruises early and Carnival experienced "robust demand" during the summer, which is its high season.
Profit Recap
Carnival was able to keep costs in check. Net cruise costs per available lower berth day, which the company says is its most important measure to measuring cruise costs, fell 2.4% and also ahead of original guidance. However, fuel costs rose 17% and profits were adversely affected by two nonrecurring items. Overall, operating income jumped 17.2% to $1.4 billion. Lower interest expense pushed net income up 20% to $1.3 billion, or $1.62 per diluted share.
Outlook
Management raised its full-year earnings range to between $2.48 and $2.52 per share. Analysts project a modest increase in revenue to $14.1 billion.
The Bottom Line
The improved sales and profit trends are encouraging, but at the current share price, Carnival trades at about 14-times forward earnings expectations. This is slightly above arch rival Royal Caribbean (NYSE:RCL), which trades at a forward P/E of 12, but is still lofty, given earnings haven't grown much in the past five years. Even if Carnival hits the high end of its earnings guidance, profits will still fall below levels seen in 2005.
Sales have grown in the single digits over this period, which is commendable, given the extremely challenging environment for consumer spending. Industry capacity should continue moving up at this level, which will benefit others in the industry, including Steiner Leisure (Nasdaq:STNR), which operates spas on cruises, and Disney (NYSE:DIS), which operates a small handful of cruise ships, but it's been some time since Carnival has been able to leverage this into earnings or cash flow growth. (For more, check out 3 Money-Saving Cruise Ship Tips.)
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IN PICTURES: 7 Tools Of The Trade
Third-Quarter Sales Review
Total revenues increased 7% to $4.4 billion, as passenger ticket sales, which accounted for the vast majority of sales at 76.3%, jumped 8.8%. Sales of items while passengers are on board grew 2.7% to 19.1% of sales, while tour and related revenue fell slightly to account for the rest of the quarterly top line.
Net revenue yields, a standard industry measure to gauge passenger capacity and profitability, grew a healthy 6.2% and were ahead of the company's own expectations. Management cited particular strength in the core North American market and decent European trends that faced an 8% increase in capacity. Overall, consumers booked more cruises early and Carnival experienced "robust demand" during the summer, which is its high season.
Carnival was able to keep costs in check. Net cruise costs per available lower berth day, which the company says is its most important measure to measuring cruise costs, fell 2.4% and also ahead of original guidance. However, fuel costs rose 17% and profits were adversely affected by two nonrecurring items. Overall, operating income jumped 17.2% to $1.4 billion. Lower interest expense pushed net income up 20% to $1.3 billion, or $1.62 per diluted share.
Outlook
Management raised its full-year earnings range to between $2.48 and $2.52 per share. Analysts project a modest increase in revenue to $14.1 billion.
The Bottom Line
The improved sales and profit trends are encouraging, but at the current share price, Carnival trades at about 14-times forward earnings expectations. This is slightly above arch rival Royal Caribbean (NYSE:RCL), which trades at a forward P/E of 12, but is still lofty, given earnings haven't grown much in the past five years. Even if Carnival hits the high end of its earnings guidance, profits will still fall below levels seen in 2005.
Sales have grown in the single digits over this period, which is commendable, given the extremely challenging environment for consumer spending. Industry capacity should continue moving up at this level, which will benefit others in the industry, including Steiner Leisure (Nasdaq:STNR), which operates spas on cruises, and Disney (NYSE:DIS), which operates a small handful of cruise ships, but it's been some time since Carnival has been able to leverage this into earnings or cash flow growth. (For more, check out 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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