Earnings Scorecard: Carnival - Analyst Blog

Carnival Corporation (CCL), the world's largest cruise company, missed the Zacks Consensus Estimate by a penny due to voyage disruption as a fire broke out in the engine room of the Carnival Splendor off the coast of Mexico. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and long-term outlook for the stock are covered in depth below.

Earnings Report Review

During the fourth quarter of 2010, Carnival reported earnings of 31 cents, ahead of the year-ago quarter of 24 cents. Earnings for the quarter also exceeded management's guidance of 25 to 29 cents per share.

The improvement in results was aided by better-than-expected net revenue yields and ongoing cost reduction initiatives, which more than offset the hike in fuel prices. The results fared better despite the recently announced voyage disruptions, which reduced earnings by 7 cents per share.

Total revenue spiked 6.6% year over year to $3.5 billion, ahead of the Zacks Consensus Estimate $3.36 billion. On a constant currency basis, net revenue yields rose 3.9% from the prior-year quarter versus management's guidance of up 2.5% to 3.5%. Gross revenue yields increased 1.5% in current dollars.

Net cruise costs, including fuel and voyage disruptions, fell 1.1% from the year-ago level on a constant dollar basis. Fuel price of $488 per metric ton was up 6.0% year over year, a slight increase from management's guidance of $479 per metric ton.

(Read our full coverage on this earnings report: Mixed 4Q for Carnival Corp.)

Earnings Estimate Revisions – Overview

Following the release of Carnival's fourth quarter results, estimate revision trends among the analysts depict a positive outlook for the upcoming quarters. Let's dig into the earnings estimate details.

Agreement of Estimate Revisions

From the table below, a positive inclination can be witnessed among the analysts, who mostly remain bullish on Carnival's optimistic outlook. Revision trends in the last 7 days drifted toward the positive side.

For fiscal 2011, 6 out of 14 analysts covering the stock raised their estimates and for fiscal 2012, 7 out of 13 analysts have increased the same. None of the analysts have decreased their estimates for 2011 and one analyst trimmed its estimate for 2012.

The analysts have increased their estimates based on higher net yield growth, management's ongoing cost containment initiatives, strong booking, favorable changes in exchange rate and company's outlook.

Additionally, pricing is expected to rise, fueled by the resurgence in consumer demand, outpacing supply growth. Moreover, free cash flow is expected to accelerate from 2011 driven by a slowdown in capacity, triggering a strong potential for dividend increase.

However, for the first quarter 2011, over the last 7 days, 3 analysts have decreased their estimates as the Caribbean operating environment is expected to be extremely competitive as a result of significant increases in industry-wide capacity, thus resulting in a decline in prices.

The first quarter of 2011 is expected to see the biggest impact from the weak Caribbean pricing, given that 67% of Carnival's North American fleet is expected in the Caribbean market. Additionally, the analysts have reduced their estimates based on higher net cruise cost and fuel cost.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Carnival has been quite significant over the last 7 days. Following the release of fourth quarter results, estimates for fiscal 2011 and fiscal 2012 have increased by 10 cents and 6 cents to $3.01 and $3.56, respectively.

However, the decline of 3 cents lowered the first quarter 2011 estimate to 19 cents. The quarter is expected to remain most challenging due to lower Caribbean pricing.

Our Recommendation

We believe Carnival will experience a strong booking and pricing trend, going forward. Its successful cost-containment efforts, strong balance sheet and a commendable debt-equity ratio, along with ample cash balance promise above-average long-term growth in an improving economy, marked by slower industry capacity growth and reviving consumer demand.

However, surging fuel prices, a greater exposure to European markets, lower Caribbean prices in the first half of 2011 and the overall economic uncertainty will likely hurt Carnival's growth in the near term. Hence, we maintain a Neutral recommendation on the shares of Carnival, with a Zacks #3 Rank, which translates into a short-term Hold rating.

Apart from Carnival, another stock that promises growth is Royal Caribbean Cruises Ltd. (RCL), which currently has a Zacks #2 Rank, translating into a short-term Buy recommendation.

Royal Caribbean reported adjusted earnings of $1.64 a share in the third quarter of fiscal 2010, which surpassed the Zacks Consensus Estimate of $1.56. The better-than-expected results were driven by improvement in close-in bookings and strict cost control.