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Carnival Back to Neutral

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We are reverting to a Neutral recommendation on cruise operator Carnival Corp. (CCL - Free Report) from Underperform as the company’s turnaround efforts remain on track.

Why Back to Neutral?

Carnival, which has been reeling under pressure for quite some time, expects its struggling Costa brand to swing back to profitability in fiscal 2013, after a year of the massive 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.

There are several other tailwinds for the company in the upcoming quarters, which include exploration of foreign shores and a reduction in fuel consumption resulting in lower input costs. Further, being the largest cruise operator, Carnival promises above-average long-term growth in an improving economy with slower industry supply growth. Carnival’s recently-concluded second-quarter fiscal 2013 results were also decent wherein its adjusted earnings per share beat the Zacks Consensus Estimate by 50%.

Despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. In the past one year, Carnival’s ships have been facing one accident after another, all of which have sharply lowered bookings. To counter above-said headwinds and trigger bookings, Carnival resorted to marketing initiatives and price promotions, which lowered its revenue yields. In-fact, Carnival has trimmed its yield guidance twice since Dec 2012.

Although Carnival announced a new program worth $300 million in Apr 2013 and executed a massive management shuffle in Jun 2013 to improve its fleet-wide efficiency and passenger safety, these initiatives are yet to pay off.

Carnival currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Players in the leisure and recreational industry, which look attractive at current levels, include Cedar Fair, L.P. (FUN - Free Report) , International Speedway Corp. (ISCA - Free Report) and Life Time Fitness Inc. (LTM - Free Report) . While Cedar Fair carries a Zacks Rank #1 (Strong Buy), International Speedway and Life Time Fitness sport a Zacks Rank #2 (Buy).

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