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Bear of the Day

Just when you thought the airlines had it tough with regulations and fuel prices, consider the cruise industry that’s not only fighting for business after several recent high profile disasters, but is also a slave to the skyrocketing costs of fuel and whims of the leisure travel business.

Annual fuel bills for cruise lines like Carnival (CCL - Analyst Report) (Zacks Rank #5) can easily add up to hundreds of millions of dollars as their ships can consume tens of thousands of gallons of fuel on any given cruise. The price of intermediate fuel oil, which most cruise ships use, has risen almost in sync with crude oil forcing many lines to take evasive action like augmenting routes for efficiency and even high performance hull coatings that reduce drag in the water.

But with the odds stacked against them and consumers strained around the globe, it might be rough seas for Carnival’s earnings.

Catastrophe, Bad Luck and Bad Press
Less than a week ago, a man fell to his death aboard one of Carnival’s newer ships, the Carnival Magic.  A week before, a 12 year old boy was air-lifted after an accident on another ship.  Then just yesterday, the Carnival Conquest was diverted from New Orleans to Mobile, Alabama as a tug-boat capsized (unrelated), closing a 10-mile stretch of the Mississippi.

All of these incidents can cost Carnival big money in direct or indirect repercussions.

In the quarter alone, there have been numerous set-backs to Carnival’s business with the EPA adding even more headwinds to an already rough ride with low-sulfur fuel requirements near U.S. coastlines and even more strict regulations coming in 2015.

Even though Carnival and others are cutting prices to record levels, passengers are still reluctant to set sail and that is effecting revenue directly. 

There was also news that Micky Arison, who has been CEO since 1979 and is the son of Carnival co-founder Ted Arison, is being replaced by Arnold W. Donald, who has served on the company's board for the past 12 years.  Investors seemed to think that Mr. Arison’s departure could be good for profits as shares have rallied; that remains yet to be seen.

Earnings Good, But Not Great
Carnival Corp. did manage to squeeze a $41 million second-quarter profit ( $0.09 per share) thanks to lower fuel costs and the 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 the quarter, compared to the consensus estimate of $3.55 billion.  Earnings and revenue were both down compared to a year ago as CCL posted $0.20 in the same quarter in last year. Quarterly revenue was down 1.2% on a year-over-year basis.

While the consensus averages a “hold” rating on the stock, we are seeing the majority of earnings estimate revisions lower over the last 60 days, despite the somewhat positive report.  This doesn’t bode well for a continuation of the recent rally.

Carnival also currently trades at over 22.5 times forward earnings and is expected to grow earnings 12.72% this year on revenue growth of only 3.0% for 2013. 

Given their string of mishaps, rising oil prices and the global flow of economic data, it looks like a more realistic trajectory for the shares may be lower.

Unless Carnival can bring their revenues up and control their fuel costs through successful trading of derivatives, it might be tough for the stock to climb back above its 200 day moving average of $36.23.

If you’re looking to invest in the entertainment industry, it might be a better idea to focus on movies with Regal Entertainment Group (RGC - Snapshot Report) (Zacks Rank #3) or take a ride on an theme park stock like Six Flags (SIX - Snapshot Report) (Zacks Rank #2)

Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

Zacks Whisper Trader- Learn to buy stocks likely to have robust earnings BEFORE they report.

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