Here's Why Carnival Can Cruise Through Chinese And Fuel Hedging Headwinds

HSBC initiated Carnival Corp CCL with a Buy rating and $60 price target following the company showed significant improvement in revenue management and cost discipline, while the investor fears around China and fuel were overdone.

As a result, despite geopolitical events, Zika and Brexit, the company's third quarter EPS was $1.92 versus a guidance midpoint of $1.85 and FY guidance has been increased by $0.05. In the quarter, the company repurchased $700 million of shares.

"With scope to generate c15% EPS growth pa over the coming years, and 5.2% FCF yield (likely to go entirely to s/h), we think the shares looks compelling on 12.7x 2017eP/E," analyst Lena Thakkar wrote in a note.

Thakkar noted that Carnival is still 3 percent below its 2008 yields vs. RCL at 12 percent above its 2008 yields, leaving 15 percent of potential catch-up.

"We forecast 3% yield growth for 2017 but see upside to this figure. Each 1% on yield is worth 4% on EPS," Thakkar continued.

Further, the analyst said concerns around lower ticket pricing in China is overblown saying such market is bound to have "have pockets of pricing weakness as demand catches up with supply."

In addition, Thakkar said Carnival generates average profitability from the region for its 5 percent exposure.

Regarding fuel, Thakker said the sensitivity is limited to 3 percent on EPS for a 10 percent move in fuel.

At time of writing, shares of Carnival were up 0.51 percent to $49.06.