Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: FY1Q18 Earnings Update
Prev. Ed.:FY4Q17 Earnings Update, Feb 21, 2018
Brokers’ Recommendations: Positive:61.5% (8 firms); Neutral: 38.5% (5); Negative: 0.0% (0) Prev. Ed.: 8; 5; 0
Brokers’ Target Price: $77.75 (↑$6.23from last edition; 13 firms) Brokers’ Avg. Expected Return: 23.2%
Portfolio Manager Executive Summary
Carnival Corporation(CCL) is the largest cruise company in the world with a portfolio of 10 cruise brands in North America, Europe, Australia and Asia. These brands operate 103 ships visiting more than 700 ports around the world. The ships have a capacity of 231,000 lower berths. Further, 18 new ships are scheduled to be delivered between 2018 and 2022.
Of the 13 firms covering the stock,eight assigned positive ratings, five rendered neutral ratings, and nonehad a negative outlook.
Positive or Equivalent Outlook (8/13 firms or 61.5%)– The firms with a positive outlook are of the view that Carnival with its diversified brands and attractive business model, along with successful cross brand collaborationis well positioned as the global leader in a consolidated industry with high barriers to entry and solid growth prospects (in terms of favorable demographics and low penetration of international source markets). They also expect the company’s cost-efficient structure to generate long-term earnings growth. Also, through a balanced mix of ordinary dividend payments and opportunistic share repurchases, the company seems to lead the charge on the return of capital to shareholders front. Moreover,these firms are encouraged by the company’s cumulative booking trend and consistent launches of ships. These firms also believe that Carnival’s cost-cutting efforts and favorable fuel price is likely to facilitate margins in the long run.
Neutralor Equivalent Outlook (5/13 firms or 38.5%) – The neutral firms are cautious that Carnival will incur higher expenses due to costs associated with its marketing initiatives as well as efforts to build more fuel-efficient ships, which may hurt its profitability. Moreover, increasing cost pressure from higher dry dock days, potential increase in fuel prices and forex translations remain potent headwinds. Moreover, booking trends might get affected by raised prices in the upcoming quarters. Nevertheless, these firms are optimistic about the company’s strong free cash flow position which facilitates high payout ratios for dividends, thereby increasing returns to shareholders.
Apr 10, 2018
Overview
The firms identified the following issues as critical for evaluating the investment merits of Carnival:
Key Positive Arguments / Key Negative ArgumentsStrong Competitive Position:Carnival has strategically positioned itself across all price points and caters to a variety of consumers. Most of the firms believe that the company will be able to exploit its position to lead the industry toward a more rational pricing environment. / Sluggish Economic Growth in Some Countries: Given Carnival’s increasing exposure in Europe in terms of revenue generation and capacity expansion, concerns arising from Brexit may hurt the company’s profitability. Moreover, terror assaults on key European cities like London, Paris and Brussels could also affect tourism.Further, the company is investing heavily in China where an economic slowdown is restricting discretionary spending and there is some uncertainty regarding Korean travel restrictions.This in turn might hurt demand and put pressure on Carnival’s top line.
Huge International Growth Opportunities: Apart from Europe, Carnival intends to grow its presence in the emerging markets of Australia,New Zealand, Asia and South America. Basically, management considers Asia, especially China,as a significant growth driver for the future and remains set to expandthe fleet size, going ahead. / Forex Headwinds: With a major portion of revenues coming from Asia and Europe, the company is highly exposed to the impact of negative currency translation. Thus, continual strengthening of the U.S. dollar against the functional currencies of the company’s foreign operations is likely to affect its results.
Founded in 1974 and headquartered in Miami, FL, Carnival Corporation (CCL) operates as a cruise and vacation company. As a single economic entity, Carnival Corporation & Carnival plc is the largest cruise operator in the world.
Carnival’s cruise ships offer various itineraries to passengers under leading cruise brands through its three primary segments — Passenger Ticket (73.9% of total revenues in fiscal 2017), Onboard and other (24.7%), and Tour and Other (1.3%). Intersegment elimination constitutes 0.1% of total revenues in the reported year.
Carnival Cruise Line is one of the most recognizable brands in the cruise industry and carried 5 million guests in2017.
Carnival Corporation’s fiscal year ends on Nov 30. Fiscal references differ from the calendar year. More information on the company is available on its website:
Apr 10, 2018
Long-Term Growth
The cruise industry is highly profitable and the fastest growing categoryin the travel, tourism and leisure space. It is witnessing increasing popularity worldwideand particularly in the Asian, European and North American markets.Carnival is considered the leader in the cruise industry with a significant market share, which allows it to benefit from the growing demand for family cruise vacations.
Carnival has adopted a strategy to grow beyond its familiar itineraries and capitalize on new markets. The Asian source market for cruises is expected to continue to grow significantly, as it becomes more consumer-driven. Carnival is especially optimistic about the prospects of the Japanese and Australian markets.
These countries boast a rapidly developing cruise market with passenger numbers soaring over the past few years and expected to rise further. A growing middle-class with high disposable income makes these markets attractive for Carnival. Moreover, an increasing number of ports and tourist destinations in Asia present tremendous growth opportunity for the cruise industry and Carnival expects to continue to grow in China and throughout Asia.
By 2020, China’s cruise market is projected to grow to 4.5 million passengers, up from 1 million in 2015, per data from the Chinese Ministry of Transport. Also, by 2030, China is expected to become the world's second largest cruise market, after the United States.
Thus, despite an economic slowdown in China, the company continues to reinforce its leadership position in the rapidly growing cruise market through increased capacity. Also, with AIDA and Carnival Cruise Line brands joining Costa Cruises and Princess Cruises in China in 2017, Carnival will have four brands in this booming market—offering more variety than any other company.
In a bid to expand its leading presence in China, Carnival has entered into a joint venture with the country’s largest shipbuilder—China State Shipbuilding Corporation—to order two cruise ships with an option for four more. The joint venture for the first ever cruise ship to be built in China supports the country’s efforts to prioritize cruise industry growth in its five-year economic development plan. The first such Chinese-built ship is slated to be delivered in 2023.
Meanwhile, the company is constantly on the lookout to foray into new destinations in order to drive demand for cruising. Markedly, the company entered markets like Cuba, Mexico and Bermuda in 2016, where demand is expected to ramp up and boost revenues significantly. In fact, Carnival Cruise Line’s Carnival Paradise is the largest ship sailing from the United States to Havana and is capturing attractive ticket price premium. Carnival has more sailing scheduled to Cuba than any other major U.S. operator. This should help it meet increased demand from travelers, who want to explore one of the most desired destinations in the Caribbean islands.
The company is also focusing on port development to make use of its industry-leading scales to create meaningfully better guest experience. In this regard, the recently-signed deal to construct a new cruise port facility on Grand Bahama Island bodes well.
The company is particularly optimistic about recent innovations like the transformational new ocean experience platform. The list of recent launches features Ocean Medallion, a guest experience platform; PlayOcean, a proprietary mobile gaming portfolio; and OceanView, a proprietary digital streaming network. These offerings are anticipated to accelerate and expand engagement and step up the company’s already high guest experience delivery.
Moreover, in third-quarter 2016, the company launched the initial phase of its yield management system, which will aid in driving incremental revenue yields over time. The company expects the new technology to contribute more meaningfully in fiscal 2018.
Carnival continues to make meaningful progress on its 2020 sustainability goals announced in September 2015, wherein it aims to focus on environmental, safety, labor and social performance. Thus, the company has been improving safety measures on its ships, making investments toward fuel efficiencies and improving offerings on board. Also, the company has raised advertising spending. While increased expenses are weighing on the company's near-term profits, they are expected to yield results in the longer term.
The company isproceeding with strategic enhancement programs as it continues to deliver state-of-the-art vessels, while replacing obsolete ones. This will help it achieve the cost-saving objectives.
Apr 10, 2018
Target Price/Valuation
Rating DistributionPositive / 61.5%↔
Neutral / 38.5%↔
Negative / 0%
Digest High / $86.00↑
Digest Low / $70.00↑
Avg. Target Price / $77.75↑
No. of the analysts with Target Price/Total / 11/13
A significant part of Carnival’s future growth is dependent on the delivery of new ships. Carnival is thus exposed to changes in the cost of building ships, including unfavorable currency swings. Carnival is also dependent on the international markets for a substantial portion of its earnings, which adds another layer of governmental and currency risks to Carnival’s business.Other risks include that yield improvement does not progress fast enough, or fuel prices rise too much. Heightened risk of terrorism activities as well as unexpected slowdown in some economies could also weigh on the company’s performance. Moreover, the recent hurricanes are likely to impact the company’s upcoming quarters in terms of decreased profits.
Recent Events
On Mar 22, 2018, Carnival reported better-than-expected fiscal first-quarter 2018 results. Earnings of 52 cents per share improved 36.8% year over year. Revenues of $4.2 billion also increased 11.6% from the prior-year quarter. This year-over-year growth in the top line was driven by strength across passenger tickets, onboard and other, and tour and other businesses.
On Mar 1, 2018, Carnival announced a quarterly cash dividend of45 cents per share that is payable on Mar 16, 2018 to shareholders of record on Feb 23, 2018.
Revenues
Revenues of $4.2 billion outpaced the consensus mark by $120.9 million and increased 11.6% year over year. This year-over-year growth in the top line was driven by strength across passenger tickets, onboard and other, and tour and other businesses.
Net revenue yields rose 3.9% from the year-ago quarter on a constant-currency basis. The upswing can be attributed to higher net ticket, and net on-board and other yields that increased 4% and 3.9%, respectively, in constant currency.
In the reported quarter, the company benefited from ongoing guest experience efforts, along with marketing and public relations programs that drove cruise ticket prices.
Segment Revenue Details
Carnival earns revenues from its Passenger Tickets business, Onboard and Other as well as Tour and Other segments.
Passenger Tickets revenues increased 12.3% year over year to $3.15 billion.
Onboard and Other revenues were $1.07 billion, up 9.5% from the prior-year quarter.
Tour and Other revenues increased44.4% year over year to $13 million.
Fiscal 2Q18 Guidance
Fiscal second-quarter 2018 net revenue yields, in constant dollars, are expected to increase in the band of 2.5-3.5% from the year-ago quarter.
Fiscal 2018 Guidance
Based on current booking trends, the company expects fiscal 2018 net revenue yields, in constant currency, to be up approximately 2.5% compared with the previous year.
Management noted that cumulative advance bookings for fiscal 2018 are well ahead of the year-ago level at significantly higher prices.
Booking Trends for 2018
Carnival is experiencing consistent improvement in booking trends because of highly effective marketing and communication efforts. The company is well positioned for continued earnings growth, given the current strength of its bookings and pricing trends for the year. Since June, booking volumes for the first half of 2018 have been running ahead of last year at basically higher prices.Including the effects of the recent hurricanes, cumulative bookings for the first half of 2018 is still well ahead of the prior year at moderately higher prices.
For the company’s North American brand, the Caribbean program is ahead of the prior year on occupancy at nicely higher prices, but of all other deployments occupancy is well ahead of the prior year at slightly higher prices.
For the EAA brands, the European deploymentand the seasonal Caribbean program has made occupancy slightly ahead at moderately higher prices. For all other deployments, price and occupancy are well ahead.
Outlook
Some firmsbelievethat the company’s strong booking trend and a strong supply environment in mature markets willenhance the company’s pricing structure.The firms believe that the company is witnessing strength in nearly every region andEurope is benefiting from a geopolitical environment.
However, considering the East Caribbean performance, a few firms expect the topline to get somewhat affected.
Margins
Net cruise costs (in constant dollar) per available lower berth day (ALBD), excluding fuel, increased 1% and was better than the December guidance of 2-3% increase. Gross cruise costs (including fuel) per ALBD in current dollars increased 9%.
Fiscal 2Q18 Guidance
Net cruise costs, excluding fuel per ALBD, are anticipated to rise in the range of 4-5% from the prior-year figure, on a constant-dollar basis.
Fiscal 2018 Guidance
Also, net cruise costs (in constant dollar) per ALBD, excluding fuel, for fiscal 2018 are anticipated to be up nearly 1% year over year, on a constant-currency basis.
Outlook
Few firms are optimistic of the company’s cost-cutting initiatives and believe that favorable fuel cost will help the company’s margins, going forward.
Earnings per Share
In 1Q18, Carnival posted earnings per share of 52 cents, outpacing the Zacks Consensus Estimate of 9 cents. Earningsalsoimproved36.8% from the prior-year quarter.
Guidancefor FY2Q18 and FY18
For 1Q18, the company expects adjusted earnings per share within50-60 cents owing to high costs.
The company raised its fiscal 2018 adjusted earnings per share guidance to the range of $4.20-$4.40, up from the previously guided range of $4.00-$4.30.
Outlook
A fewfirms raised theirEPSoutlook for fiscal 2018onexpectationsof higher yields, strong booking trends and improved revenues. Favorable currency translation and beneficial fuel prices also make these firms optimistic. The firms’ raised outlook is also attributable to a favorable industry scenario.
However, some firms believethat higher costs associated with cruises and soft performance in the Eastern Caribbean is worrisome.
Apr 10, 2018
Research Analyst / Rajashree BhattacharyyaCopy Editor / Shremoyee Mandal
Content Ed. / Harendra Ray
Reason for Update / Earnings Update