Carnival's Strategic Initiatives Bode Well: Should You Hold?

Rising demand for cruise travel, the addition of new ships to its fleet and solid booking trends bode well for Carnival (LON:CCL) Corporation (NYSE:CCL) . Also, the company delivered better-than-expected earnings for the tenth successive quarter, when it reported second-quarter fiscal 2018 results.

However, shares of Carnival witnessed a sharp decline following the quarterly results. This downturn can be attributed to the company’s trimmed earnings guidance for fiscal 2018. The stock has also underperformed the industry in a year’s time. While Carnival has declined 10%, the industry increased 0.1%. Let’s delve deeper.

Hidden Catalysts

Carnival is the historically the most profitable cruise operator in the world. Its cruise brands are well diversified across diverse geographies, including Asia and Europe, and strategically positioned at various price points within the larger North American cruise market. This enables the company to cater to passengers in various geographic regions as well as within the contemporary, premium and luxury cruise segments.

Moreover, the company continues to introduce flagships to create demand. 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. This cruise ship has been very well received by its guests.

During the second quarter of 2018, the company launched Carnival Horizon (belonging to Carnival Cruise Line brand) and Seabourn Ovation (Seabourn). Further, AIDAnova (AIDA Cruises) and ms Nieuw Statendam (Holland America Line) are slated for a December launch. Notably, Carnival has 18 new ships scheduled to be included in its portfolio of leading global cruise brands between 2018 and 2022.

Meanwhile, the Zacks Rank #3 (Hold) company believes that it is well positioned for continued earnings growth, given the current strength in bookings particularly in Caribbean, Alaska, Europe, Asia and Australia along with pricing trends for 2018. In fact, management noted that booking trends for third and fourth quarter of fiscal 2018 have been better than the last year at basically higher prices. Also, cumulative bookings for 2018 are still well ahead of the prior-year’s figure on both press and occupancy at this point in time. As a result, Carnival expects revenue yields (in constant dollars) to continue improving in fiscal 2018 driven by marketing initiatives and a better booking environment.

Concerns

Carnival lowered fiscal 2018 adjusted earnings per share guidance to the band of $4.15-$4.25 from the previously guided range of $4.20-$4.40 due to higher fuel costs. During the second quarter, net cruise costs (in constant dollar) per available lower berth day (ALBD), excluding fuel, increased 3.6% and were better than the March guided range of 4-5% rise. Gross cruise costs (including fuel) per ALBD in current dollars improved 8.8% as well.

Negative currency translation also remains an added 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.

Key Picks

Some better-ranked stocks in the leisure space include Lindblad Expeditions (NASDAQ:LIND) , Town Sports International Holdings, Inc. (NASDAQ:CLUB) and RCI Hospitality (NASDAQ:RICK) . While Lindblad sport a Zacks Rank #1 (Strong Buy), Town Sports International and RCI Hospitality carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lindblad, Town Sports International and RCI’s earnings for 2018 are expected to grow 155.6%, 211.8% and 52.5%, respectively.

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