Cruise line operator Carnival (NYSE:CCL) (NYSE:CUK) closed out its fiscal year and carried nearly 10 million passengers on the 100 ships it operates across the globe. It plans an additional 10 ships by early 2016, and has an impressive multi-decade record of solid sales growth. Unfortunately, its ability to push profits forward in recent years has been torpedoed by a couple of key factors.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Full Year Recap
Revenues advanced 9% to $15.8 billion. Passenger ticket sales constituted the majority of the top line at 78% and grew 9.7%. Onboard revenues, which include the sale of items including alcohol and entertainment, was the next largest category at 22% of sales and increased 8.2%. Tour-related revenue made up the remaining 1.7% and was flat. Net revenue yields, an industry measure of passenger capacity, moved ahead 2.1%, when stripping out the effects of currency fluctuations.

Despite the solid sales trends, operating income fell 3.9% to $2.3 billion, or 14.3% of total sales. The operating income margin has experienced a steady decline since 2005 when it reached nearly 24%. Higher fuel costs are largely to blame and jumped 35.2% for the year to $2.2 billion. Lower interest and income tax expenses helped temper the net income decline slightly as earnings fell 3.3% to $1.9 billion. Share buybacks also helped slightly as earnings per diluted share fell 2% to $2.42. Free cash flow came in at roughly $1.1 billion and was made up of $3.8 billion in operating cash flow less $2.7 billion in capital expenditures to build new ships and maintain the existing ones. (To know more about income statements, read Understanding The Income Statement.)

For the coming year, analysts currently project 4.2% sales growth and total sales of $16.5 billion. Carnival said to expect earnings between $2.56 and $2.88 per diluted share, which would represent annual growth in a range of 5.8 and 19%.

The Bottom Line
If Carnival hits the higher end of its earnings guidance, profits will stand roughly where they did five years ago. Since that time, the company has had to endure a global recession and volatile fuel costs. Management has recently implemented a fuel hedging program to try and better manage unpredictable fuel commodity prices, but the fact remains it is a huge cost that its ships need to carry passengers across the world's oceans. It is also very expensive to build new ones, and this eats up a high percentage of operating cash flow each year.

In many respects, Carnival's operations resemble the airline industry and firms including United Continental (NYSE:UAL) and Delta Air Lines (NYSE:DAL). Carnival, along with archrival Royal Caribbean Cruises (NYSE:RCL) dominates the cruise industry, but as with airlines the heavy fixed costs needed to operate the fleets have made it difficult for shareholders to earn an adequate return on their investments. Profit growth for the coming year looks impressive, but the main concern is whether Carnival will be able to sustain it going forward. Maybe the fuel hedging program will help the firm get out if its multi-year profit rut. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!