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Carnival Banks on Robust Booking Trend, Cost Woes Linger

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Carnival Corporation (CCL - Free Report) continues to gain from solid booking trend, strategic initiatives, the launch of new ships and burgeoning demand for cruise travel. However, the company’s drab guidance for second-quarter and fiscal 2019, and higher costs are major concerns at the moment. Year to date, shares of Carnival have gained 6.2% compared with the industry’s 12.7% growth. Let’s delve deeper.

Hidden Catalysts

We believe current strength in bookings, particularly in the Caribbean, Alaska, Europe, Asia and Australia, along with pricing trends for 2019 are likely to benefit the company in the coming quarters. Additionally, Carnival stated that booking trends for Costa Esmeralda are witnessing a steady uptick.

Moreover, the company consistently enjoys ticket price improvements for both its North American and EAA brands, with particularly robust ticket price improvements in its core Caribbean deployment. This apart, Carnival continues to drive revenue yield growth by creating demand in excess of measured capacity growth through its ongoing guest experience, marketing and public relations effort.

In a bid to form additional demand creation opportunities, Carnival is consistently introducing new flagships. In June 2017, its Germany-based AIDA Cruises brand launched AIDAperla — one of the world's most eco-friendly and technologically advanced ships. Carnival also launched Majestic Princess from Princess Cruises in March, which is the world's first cruise ship built specifically for the Chinese market. The ship has been very well received by its guests.

Carnival has 18 new ships scheduled to be included in its portfolio of leading global cruise brands between 2018 and 2022. During third-quarter fiscal 2018, the company finalized contracts for two more next-generation ships powered by LNG to be delivered in 2023 and 2025. Order for LNG powered ship has increased to 11.

Meanwhile, during third-quarter fiscal 2018, Carnival completed the rollout 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 the company to garner incremental revenues in the second half of 2019 and beyond. Carnival believes that implementation of YODA will help it to squeeze additional yield by taking full advantage of the trade-offs.

Concerns

Carnival’s recent decline in share price can be primarily attributed to its drab guidance for second-quarter and fiscal 2019. Carnival expects second-quarter fiscal 2019 EPS to be 56-60 cents compared with adjusted earnings of 68 cents per share registered in the prior-year quarter. For fiscal 2019, the company anticipates EPS to be in the $4.35-$4.55 band, down from $4.50-$4.80 projected earlier.

Earnings estimates for the current quarter and year have also declined 15.3% and 4.2%, respectively, over the past 30 days. This reflects analysts’ concern regarding the company’s earnings potential.

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 might weigh on near-term margins and earnings.

Also, increased investments in advertising and TV programming are adding to the company’s costs. During the first quarter of fiscal 2019, net cruise costs (in constant dollar) per available lower berth day (ALBD), excluding fuel, increased 0.8%. Gross cruise costs (including fuel) per ALBD, in current dollars, were up 11.1%. During fiscal 2019, the company expects full-year net cruise costs (excluding fuel) per ALBD to be up approximately 0.5%.

Zacks Rank & Stocks to Consider

Carnival has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Planet Fitness, Inc. (PLNT - Free Report) , Live Nation Entertainment, Inc. (LYV - Free Report) and Lindblad Expeditions Holdings, Inc. (LIND - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Planet Fitness reported better-than-expected earnings in the trailing four quarters, with average being 9.1%.

Live Nation Entertainment’s current-year earnings are likely to grow by 588.9%.

Lindblad Expeditions’ current-year earnings are likely to grow by 83.3%.

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