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Carnival Down Despite Q2 Earnings Beat

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Miami-based cruise company Carnival Corp.’s (CCL - Free Report) slid 3% despite the company reporting better-than-expected fiscal second-quarter 2014 results. The company’s weak guidance for the upcoming quarter failed to boost investors’ confidence. Additionally, it seems that investors are aware of rising fuel costs next quarter, which should dent profits.  

The company’s adjusted earnings of 10 cents per share surpassed the Zacks Consensus Estimate of 2 cents as well as management’s guidance range of a loss of 2 cents to earnings of 2 cents.
Further, quarterly earnings were higher than the year-ago quarter figure of 7 cents per share.  Higher revenues, better-than-expected revenue yields as well as lower than anticipated cruise costs drove the year-over-year rise in earnings.

Second-quarter earnings excluded a net gain on vessel transactions and net unrealized gains on fuel derivatives.

Total revenue in the quarter rose 4.4% year over year to $3.63 billion. Also, revenues beat the Zacks Consensus Estimate of $3.58 billion by 1.4%. Revenues in the quarter benefitted from higher in cruise sales and onboard spending.
However, net revenue yields (in constant currency) declined 2.2% year over year in the second quarter, better than the company's guidance of 3.0–4.0% decline. Gross revenue yields (in current dollars) also dropped 0.5%.
Segment Revenues
Carnival earns revenues from its Passenger Tickets business, Onboard and Other as well as Tour and Other segments.
Passenger Tickets: Passenger Tickets revenues in the quarter increased 3.3% year over year to $2.7 billion.
Onboard and Other: Onboard and Other revenues were $905.0 million, up 7.9% year over year.
Tour and Other: Revenues increased 11.1% year over year to $30.0 million.
Income & Expenses
Operating income was $155 million in the reported quarter, up 2.0% year over year as a result of higher revenues.
Net cruise costs (in constant dollar) per available lower berth day (ALBD) (fuel and impairments excluded) increased 1.2%, primarily due to higher dry-dock costs, as well as advertising and promotion expenses. However, costs improved from the company’s March guidance of 2.5% to 3.5%.
Carnival’s ships have been facing one accident after another, significantly affecting its performance. In order to recover, the company has undertaken a series of initiatives. Although these initiatives have pressured the company’s profit — raising its costs at the current level — these are expected to prove beneficial over the long term.
Fuel price was $657 per metric ton in the quarter, down 3.7% year over year, while fuel consumption declined 6.0% year over year. However, fuel costs were higher than the company’s March guidance of $649 per metric ton.
Third-Quarter Fiscal 2014 Guidance
The company projects its fiscal third-quarter to be weak compared to the prior year quarter levels. Carnival expects net revenue yield (in constant dollar) to remain flat to down by 1% in third-quarter fiscal 2014. Net cruise costs per ALBD (in constant dollar), excluding fuel, are projected to increase 1−2%.    
Based on higher costs and lower revenue yields, the company expects its bottom line to be in the range $1.38–$1.44 per share in the third quarter versus the year-ago earnings of $1.38 per share.
Full-Year Fiscal 2014 Guidance
For fiscal 2014, Carnival expects its earnings to be within $1.60–$1.75. Earnings in fiscal 2013 were $1.58 per share.
The company’s revenue yield is expected to be down slightly on a year-over-year basis in 2014. Net revenue yields (in constant dollar) were guided to be either flat or marginally up in fiscal 2014.
Carnival also expects net cruise costs, excluding fuel per ALBD (on a constant dollar), to be flat to up slightly in fiscal 2014 compared with the year-ago levels. This  guidance is lower as compared to the company’s expectations in March.
Our Take
We believe Carnival’s turnaround remains on track. The company’s several brand-building efforts and other marketing promotions are expected to be beneficial. Carnival recently partnered Dr. Seuss Enterprises to provide a variety of exciting and immersive dining and entertainment experiences on its fleet of 24 "Fun Ships” as part of its brand-building efforts.
Reduction in fuel consumption is another bright spot in Carnival’s report card. However, higher operating costs remain a major headwind for the Zacks Rank #3 (Hold) company.
Some better-ranked stocks in the leisure and recreational industry include Six Flags Entertainment Corporation (SIX - Free Report) , Royal Caribbean Cruises Ltd. (RCL - Free Report) and Speedway Motorsports Inc. (TRK - Free Report) . All these firms sport a Zacks Rank #2 (Buy).


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