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Carnival Rides on Higher Revenue Yield Despite High Costs

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Carnival Corporation (CCL - Free Report) , being the most profitable cruise operator in the world, continues to enjoy robust booking trends and strong revenue yields. However, high costs and macroeconomic issues in the key operating regions remain potent headwinds.

In the last month, Carnival reported mixed fourth-quarter fiscal 2018 results, wherein earning surpassed estimates but revenues lagged the same. However, revenues grew year over year on a constant-currency basis. The upswing was primarily driven by higher net ticket, and net onboard and other yields.

Meanwhile, shares of Carnival have lost 11.6% over the past six months, almost in line with the industry’s collective decline.

Top Line Impresses

Carnival 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. The company continues to drive revenue yield growth by creating demand in excess of measured capacity growth through its ongoing guest experience, marketing and public relations efforts.In fiscal 2018, total revenues increased 7.8% year over year. Passenger ticket revenues increased 7.6%, whereas onboard and other revenues increased 8.1% from the year earlier.

The company is particularly positive about its recent innovations like the transformational new ocean experience platform, featuring Ocean Medallion, a guest experience platform; PlayOcean, a proprietary mobile gaming portfolio; and OceanView, a proprietary digital streaming network. These new offerings are anticipated to accelerate and expand engagement, and step up the company’s already high guest experience delivery by leveraging its industry-leading scale.

Meanwhile, during third-quarter fiscal 2018, Carnival completed the rollout of the company’s new state-of-the-art revenue-management system, YODA. This revenue management system, which has been deployed across six of Carnival’s brands, will help it to garner incremental revenues in the second half of fiscal 2019 and beyond. Carnival believes that the implementation of YODA will help it squeeze additional yield by taking full advantage of the trade-offs. Resultantly, Carnival expects net cruise revenues to be up 5.5%, with capacity growth of 4.6% and higher net revenue yields of 1% in 2019.

High Costs Hurt

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 would put pressure on near-term margins and earnings. Increased investments in advertising and TV programming are adding to the company’s costs. During the fourth quarter of fiscal 2018, gross cruise costs (including fuel) per available lower berth day (ALBD) increased 2.4%. For fiscal 2019, the company expects net cruise costs (excluding fuel) per ALBD to be up approximately 0.5% from the prior fiscal year.

Meanwhile, 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 Carnival’s earnings growth.

Zacks Rank & Stocks to Consider

Carnival currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry are Cedar Fair (FUN - Free Report) , Cinemark (CNK - Free Report) and Norwegian Cruise Line (NCLH - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cedar Fair, Cinemark and Norwegian Cruise Line’s earnings for 2019 are expected to increase 14.7%, 11.5% and 5.8%, respectively.

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