Annualfuel bills for cruise lines like Carnival CCL (Zacks Rank #5) can easily add up to hundreds ofmillions of dollars as their ships can consume tens of thousands of gallons offuel on any given cruise. The price of intermediate fuel oil, which most cruiseships use, has risen almost in sync with crude oil forcing many lines to take evasiveaction like augmenting routes for efficiency and even high performance hullcoatings that reduce drag in the water.
Butwith the odds stacked against them and consumers strained around the globe, itmight be rough seas for Carnival’s earnings.
Catastrophe,Bad Luck and Bad Press
Less than a week ago, a man fell to his deathaboard one of Carnival’s newer ships, the Carnival Magic. A week before, a 12 year old boy wasair-lifted after an accident on another ship. Then just yesterday, the Carnival Conquest was diverted from New Orleansto Mobile, Alabama as a tug-boat capsized (unrelated), closing a 10-milestretch of the Mississippi.
All of these incidents can cost Carnival bigmoney in direct or indirect repercussions.
In the quarter alone, there have beennumerous set-backs to Carnival’s business with the EPA adding even more headwindsto an already rough ride with low-sulfur fuel requirements near U.S. coastlinesand even more strict regulations coming in 2015.
Even though Carnival and others are cuttingprices to record levels, passengers are still reluctant to set sail and that iseffecting revenue directly.
There was also news that Micky Arison, whohas been CEO since 1979 and is the son of Carnival co-founder Ted Arison, isbeing replaced by Arnold W. Donald, who has served on the company's board forthe past 12 years. Investors seemed tothink that Mr. Arison’s departure could be good for profits as shares haverallied; that remains yet to be seen.
EarningsGood, But Not Great
Carnival Corp. did manage to squeeze a $41million second-quarter profit ( $0.09 per share) thanks to lower fuel costs andthe timing of some administrative expenses. This was a pleasant surprise and beat the Zacks Consensus by 3 cents.
Carnival had revenue of $3.50 billion for thequarter, compared to the consensus estimate of $3.55 billion. Earnings and revenue were both down comparedto a year ago as CCL posted $0.20 in the same quarter in last year. Quarterlyrevenue was down 1.2% on a year-over-year basis.
While the consensus averages a “hold” rating onthe stock, we are seeing the majority of earnings estimate revisions lower overthe last 60 days, despite the somewhat positive report. This doesn’t bode well for a continuation ofthe recent rally.
Carnival also currently trades at over 22.5times forward earnings and is expected to grow earnings 12.72% this year onrevenue growth of only 3.0% for 2013.
Given their string of mishaps, rising oilprices and the global flow of economic data, it looks like a more realistictrajectory for the shares may be lower.
Unless Carnival can bring their revenues upand control their fuel costs through successful trading of derivatives, itmight be tough for the stock to climb back above its 200 day moving average of$36.23.
Ifyou’re looking to invest in the entertainment industry, it might be a betteridea to focus on movies with RegalEntertainment Group RGC (Zacks Rank #3) or take a ride on an theme parkstock like Six Flags SIX (Zacks Rank #2).
Jared A Levy is one of the most highly sought after traders in the world and aformer member of three major stock exchanges. That is why you will frequentlysee him appear on Fox Business, CNBC and Bloomberg providing his timelyinsights to other investors. He has written and published two tomes, “YourOptions Handbook” and “TheBloomberg Visual Guide to Options”. You can discover more of hisinsights and recommendations through his two portfolio recommendation services:
Zacks Whisper Trader- Learn tobuy stocks likely to have robust earnings BEFORE they report.
Zacks TAZR Trader – Technical Analysis +Zacks Rank. Best of both worlds approach to find timely trades.
FollowJared A Levy on twitter at @jaredalevy
LikeJared A Levy on Facebook