Carnival Cruises Feels Fuel Crunch

We maintain our Hold rating for Carnival Corporation (CCL - Analyst Report) ahead of the release of the company's second-quarter financial results. Carnival is not only the largest cruise operator in the world, but has also been historically the most profitable.

However, increased fuel costs are expected to again negatively impact the company's bottom line in 2008. Management anticipates that higher fuel prices will cost the company approximately $0.65 per share in earnings during 2008.

Carnival has historically traded at a premium to Royal Caribbean (RCL - Analyst Report), based on forward price to earnings multiples. This relationship still holds, based on current prices and our forward twelve month EPS estimates for both companies. While Carnival Corporation is trading at 12.1x estimated 2008 earnings, Royal Caribbean is currently trading at 9.3x estimated 2008 EPS.

We expect Carnival to continue to trade at a premium over the near-term. However, given our expectation for continuing margin pressures, we do not feel that material price appreciation is warranted at this time. Our six-month target price of $37.00 is based on a multiple of 12x expected 2008 earnings.

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