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We maintain our Neutral recommendation on Carnival Corporation (CCL - Analyst Report) based on the strong fiscal fourth quarter and 2013 results reported on Dec 19, 2013. However, the company offered a muted outlook for fiscal first quarter 2014, which keeps us on the sidelines.

Carnival reported impressive fourth-quarter fiscal 2013 results. Though quarterly earnings of 4 cents declined 71.4% year over year due to increased operating costs, it beat the Zacks Consensus Estimate of a breakeven result. Total revenue in the quarter increased 2.2% year over year and comfortably surpassed the Zacks Consensus Estimate by 2.3%. Revenues in the quarter were driven by increased cruise sales, which offset lower net revenue yields. Driven by the strong results, the Zacks Consensus Estimate for fiscal 2014 and 2015 largely moved upwards over the last 30 days.

Carnival’s cruise brands are well diversified across geographic regions and strategically positioned at various price points within the larger North American cruise market. With the strength and diversity of its brands and itineraries, the company has been successful in capturing a broader passenger base among potential and repeat cruise vacationers.

The company is set to expand fleet size in Asia as it considers it to be a significant growth driver for the future. Also, it is working on a strategy to grow beyond its familiar itineraries and capitalize on Asian opportunities. In fact, in 2013, the company was successful in doubling its presence in China and in launching a home port in Japan.

The company has been trying to reduce its fuel consumption for the last few quarters. The company succeeded in its efforts, as its fuel consumption declined 5% per unit in fiscal 2013. Also, during the fourth quarter, fuel prices declined 6.3% year over year and were lower than expected. Going forward, these initiatives would also help the company in meeting air emission standards, while curtailing fuel costs.

Despite these positives, we remain concerned due to higher operating costs, which remain an overhang on margins. Higher operating costs could be attributed to increased marketing spend and costs incurred to improve entire cruise operations and enhance guest satisfaction, which would hurt the bottom line in the near-term.

Further, the company also does not expect revenue yield to improve before the second half of fiscal 2014. The company expects net revenue yield to decline in the range of 3% to 4% in first-quarter fiscal 2014. Net cruise costs per available lower berth day, excluding fuel, are projected to increase 4.5%−5.5%, resulting from increased advertising expenses. Based on higher costs and lower revenues, the company expects a loss of 7 cents to 11 cents per share in the first quarter.

Other Stocks to Consider

The company presently has a short-term Zacks Rank #2 (Buy). Some other stocks worth considering in the sector include SeaWorld Entertainment, Inc. (SEAS - Snapshot Report), HomeAway, Inc. (AWAY - Snapshot Report) and Town Sports International Holdings Inc. (CLUB - Snapshot Report). While SeaWorld Entertainment holds a Zacks Rank #1 (Strong Buy), HomeAway and Town Sports International Holdings carry a Zacks Rank #2 (Buy).

 

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