Carnival Corporation CCL released their FQ2 earnings report before the market opened on Tuesday, in which they reported earnings that beat expectations.
The Miami-based Carnival is the largest company in the cruise industry, currently operating 10 global brands as well as over 100 ships. CCL reported FQ2 earnings of $0.49 per share, beating the Zacks Consensus Estimate by $0.10. The firm also announced revenue of $3.71B, beating estimates by $30M.
Important to note is CCL’s guidance for this fiscal year, which ends in November. This is up to an expectation of a net yield of 3.5% year over year, up from March’s guidance of 3%. CCL management noted that second through fourth fiscal quarters’ bookings are “well ahead of last year’s totals, and at higher prices,” signaling their confidence in continued strength.
CCL has authorized the buyback of another $1B worth of stock, of which the firm has already bought $1.9B since October, signaling their confidence moving forward.
FQ2 earnings continue CCL’s trend of beating expectations, with an average EPS surprise of 27.84%. It gives us further reason to draw some conclusions about the firm and as well as the Leisure industry as a whole. Before getting overly optimistic, let’s take a look at three key takeaways from today’s report.
Inputs Play a Key Role
As per CCL’s press release, “changes in fuel prices and currency exchange rates contributed $0.04 per share to FQ2 earnings.” It has been two years now since the cost of oil plummeted from the over $100 per barrel price at which it traded. The energy industry has felt the pain associated with this, but for a company like Carnival, it has served to help increase profit margins.
Net cruise costs excluding fuel expenses decreased 1.9% compared with estimates for an increase of between 0.5% and 1.5%. However, if oil prices continue to rise, companies like CCL will be directly and negatively impacted.
Oil’s volatility stems from many moving parts, one of which is supply and demand. Depending on how many barrels are expended weekly, the market reacts. As our team highlights, factors such as a looming worker strike in Norwegian oil firms and rebel attacks on oil infrastructure in Nigeria have brought prices up.
The point stands that the macroeconomic atmosphere is very volatile, and major shifts could continue to benefit or severely cripple CCL.
Carnival Relies on Europe and Good Weather
CCL has three major business markets: the Caribbean, Alaska and Europe. As TheStreet reports, consumer activity in the Caribbean has decreased from nearly half of all bookings to a third of them. As a direct result, dependence on revenue from Europe has increased.
As our team covered, Brexit has positive effects for U.S. tourists looking to travel to Europe, but not for European tourists. British and European travelers will have to spend more on everything, including CCL cruises. Because CCL is so heavily exposed to Europe and not the U.S., Brexit could negatively bring down revenues from here on out.
Like any other cruise business, CCL is heavily exposed to changes in weather. FQ3, which encompasses summer, is generally the largest source of revenue for these companies. In CCL’s case, current FQ3 EPS estimates sit at around $1.98 per share, dramatically higher than this fiscal quarter.
Things may appear smooth sailing at this point, but it is important to consider that 67% of earnings estimate revisions for this fiscal year have been downward. Although that estimate is still a positive one at an EPS of $3.39, CCL is entirely subject to macroeconomic headwinds as described above.
Travel Industry Outlook
Although CCL’s earning reports is a good sign, the broader picture in the travel industry could be a bit grimmer. As our team’s tourism report continues, travel in the EU will become hampered by British exit from the EU, particularly due to the “Open Skies” policy that made it free for any EU airline to fly between two points within Europe.
The travel industry is subject to the same macroeconomic factors that CCL is: input costs, consumer spending, currency strength, etc. This means that factors that would drag CCL down will drag other travel companies down as well. In the short term, this next fiscal quarter should be good for most major firms that are not overly or solely exposed to Europe.
Brexit has great potential for U.S. tourists, with the dollar up and the pound trading at a 32 year low along with a weak Euro. It is a reasonable assumption that international tourism in Europe could increase. This could potentially benefit U.S. based firms such as United Airlines UAL and Delta Airlines DAL.
Carnival’s strong earnings report is a reason for investors to rejoice, as they have been and are continuing to beat expectations. Although inventory is limited for the rest of the year, CCL management has positive, narrowed expectations. All in all, current signs point towards a fairly solid performance this fiscal year for CCL.
However, investors should also maintain skepticism and keep watch on Europe, as consumer behavior there will define performance for many firms, of which CCL is one. The best course of action is to maintain a cautiously optimistic mindset moving forward.
Carnival Corporation (CCL) currently sits at a Zacks Rank #3 (Hold).
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