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.
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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.)

Outlook
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.)

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

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