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Carnival Banks on Strong Booking Trends Despite Rising Costs

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Carnival Corporation (CCL - Free Report) is the largest and historically the most profitable cruise operator in the world. The company’s market-leading position offers a cost advantage, allowing it to generate higher return on investment than smaller companies.

Carnival, which has been showing strong booking trends, is focusing on the launch of more ships to meet the increased demand. Further, penetration in fast-growing Asian markets, as well as a robust revenue management system, is likely to prove beneficial in the upcoming quarters.

However, rising fuel prices and currency headwinds have been persistently plaguing this cruise giant. Despite reporting better-than-expected earnings in third-quarter fiscal 2018, shares of Carnival declined sharply due to soft earnings outlook for fiscal fourth quarter. The company expects earnings of 65-69 cents for the fiscal fourth quarter. In the past three months, the company has witnessed marginal loss of 1.6% against the industry’s 8.5% decline.

Top-Line Initiatives Bode Well

Carnival primarily focuses on initiatives that drive the company’s top-line growth. It continues to grow its revenue yield by creating demand in excess of measured capacity growth through its ongoing marketing and public relations effort. The company continues to enjoy ticket price improvements for both its North American and EAA brands, with particularly robust ticket price improvements in its core Caribbean deployment. In fact, in fiscal 2017, Carnival’s ticket prices increased 4.5%.

Meanwhile, booking trends for third and fourth quarters of fiscal 2018 were better than the last year at basically higher prices. Moreover, cumulative bookings for fiscal 2018 are still well ahead of the prior year on both press and occupancy at this point in time. Consequently, the company expects revenue yields (in constant dollars) to continue improving in fiscal 2018, driven by marketing initiatives and a better booking environment.

The company is also increasing its expenditure on advertising to drive bookings and boost revenues. Moreover, Carnival is promoting its brands through documentaries, television programs, motion pictures and digital initiatives to improve brand perception.

Finally, during the third quarter of fiscal 2018, Carnival completed the rollout of a state-of-the-art revenue-management system, YODA. This revenue management system, which has been deployed across six of Carnival’s brands, is expected to help the company garner incremental revenues in the second half of fiscal 2019 and beyond. Carnival believes that the implementation of YODA is likely to help it to squeeze additional yields by taking full advantage of the trade-offs.

Concerns

Carnival aims to make additional investments this year as its brands have identified further revenue generating opportunities. Though these efforts are expected to benefit the company over the long run, these are likely to put pressure on near-term margins and earnings. Moreover, increased investments in advertising and TV programming are adding to the company’s costs.

During the fiscal third quarter, net cruise costs (in constant dollar) per available lower berth day (ALBD), excluding fuel, increased 2.7%. For fiscal 2018, the same metric (in constant dollar) per ALBD, excluding fuel, is anticipated to be up nearly 1.5% year over year.

Further, negative currency translation is a concern for Carnival. With a major portion of its revenues coming from Asia and Europe, the company is highly exposed to the impact of negative currency translation. Thus, continual strengthening of the U.S. dollar against the functional currencies of the company’s foreign operations is likely to adversely impact its results. Moreover, an increase in fuel prices is likely to prove detrimental to the company’s earnings growth.

Zacks Rank & Stocks to Consider

Carnival currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the leisure space include Marcus Corporation (MCS - Free Report) , Hudson (HUD - Free Report) and SeaWorld Entertainment (SEAS - Free Report) . While Marcus Corporation and Hudson sport a Zacks Rank #1 (Strong Buy), SeaWorld Entertainment carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Current-year earnings for Marcus Corporation, Hudson and SeaWorld Entertainment are expected to increase 22.1%, 104.6% and 138.1%, respectively.

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