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We remain Neutral on Carnival Corp. (CCL - Analyst Report). Although the cruise company’s better-than expected third quarter fiscal 2013 results impressed us, some near term concerns keep us on the sidelines.
Why the Reiteration?
On Sep 24, 2013, Carnival reported fiscal third-quarter 2013 adjusted earnings of $1.38 per share, which beat the Zacks Consensus Estimate of $1.30 by 6.2%. Revenues of $4.73 billion in the quarter were also ahead of the Zacks Consensus Estimate of $4.64 billion by nearly 1.9%.
Management expects its struggling Costa brand to swing back to profitability by the end of 2013, after a year of the Costa Concordia accident. Carnival’s ship, Costa Concordia suffered a tragic accident in mid-Jan 2012 on the west coast of Italy. The tragedy shattered passenger confidence and resulted in subdued bookings.
Management expects Costa’s revenue yields to be up in the fourth quarter of fiscal 2013, following the lap of the ship grounding disaster. Overall, the recovery process is on track and the company expects to see positive pricing comparisons from the second half of 2014.
Carnival has adopted a strategy to grow beyond its familiar itineraries and capitalize on Asian opportunities. One such initiative is the formation of Carnival Japan, Inc., which will cater to the fast growing Japanese market.
Despite these promising facts, we are cautious on Carnival. In Europe, where the Costa Concordia disaster took place, the dip in bookings has been steeper. A relatively weaker economy and less familiarity with cruising were the other reasons for the downside in bookings in the recent times. Though the Costa scenario has improved, benefiting from the marketing initiatives taken by the company, we are yet to see the momentum of the pre-disaster level.
Further, several operational issues are taking a toll on Carnival of late. Its ships have been facing one accident after another, all of which had a sharp negative impact on bookings. The engine of Carnival’s Triumph cruise ship, carrying around 3,000 passengers in the Caribbean, caught fire in early Feb 2013. Again, in Mar 2013, Carnival’s ship, the Carnival Dream was docked in the Caribbean due to equipment problems, adding to the company’s woes.
In order to improve its fleet-wide efficiency and ensure better safety for its passengers, Carnival announced a new program worth $300 million in Apr 2013. Moreover, the company plans to invest nearly $600 to $700 million to improve its entire cruise operations and enhance guest satisfaction thereby weighing on its cost structure.
Finally, Carnival tightened its earnings guidance for fiscal 2013 to $1.51–$1.57 from its previous guidance of $1.45–$1.65. The company trimmed its earnings guidance in view of the expected higher-than-expected fuel prices and increased cruise costs.
Carnival currently carries a Zacks Rank #3 (Hold). Others players in the leisure and recreational services industry, which look attractive at current levels include Cedar Fair, L.P. (FUN - Snapshot Report), Live Nation Entertainment, Inc. (LYV - Snapshot Report) and Regal Entertainment Group (RGC - Snapshot Report), all carrying a Zacks Rank #2 (Buy).