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Carnival (CCL) Rides on Bookings, Strong Cruising Demand

On Jul 12, we issued an updated research report on cruise and vacation company Carnival Corporation CCL.

Last month, the company posted better-than-expected second-quarter fiscal 2017 results, wherein both earnings and revenues beat the Zacks Consensus Estimate. Meanwhile, Carnival anticipates earnings in the band of $3.60 to $3.70 per share for fiscal 2017 (previous projection was in the range of $3.50 to $3.70).

Notably, this Zacks Rank #2 (Buy) company’s shares have outperformed the Zacks categorized Leisure & Recreation Services industry year to date. The stock has gained 26.7%, outpacing the industry’s rally of 18.5%, during the same period.

In fact, the company continues to reflect strength in several areas, and is thus expected to continue performing well in the quarters ahead.

Key Growth Drivers

Strong Brand Recognition: Carnival is the largest and historically the most profitable cruise operator in the world. With the strength and diversity of its brands and itineraries, the company boasts a broader passenger base among potential and repeat cruise vacationers. Additionally, its leading position in the market offers a cost advantage, allowing Carnival to generate higher return on investment than smaller companies.

Launch of New Ships: Of late, Carnival has been continually introducing new flagships to formulate measured capacity growth over time. This also allows its global fleet to meet escalating demand for cruise vacations in every region of the world. In fact, currently Carnival has 19 new ships planned to be delivered between 2017 and 2022.

We note that the launch of new ships is also part of the company’s long-term strategy to build state-of-the-art vessels that aid in providing guests with a remarkable vacation experience at an exceptional value.

Given burgeoning demand for cruise travel in 2017, the addition of new ships to its fleet bodes well.

Exploring Foreign Shores: Carnival has adopted a strategy to grow beyond its familiar itineraries and capitalize on new markets. The Asian source market for cruises is expected to continue growing significantly, as it becomes more consumer-driven. Carnival is especially optimistic about growth prospects of the Japanese and Australian markets.

These countries boast a rapidly developing cruise market with passenger numbers soaring over the last few years and expected to increase further. It is to be noted that a growing middle-class with high disposable income makes these markets an attractive bet for Carnival. Moreover, an increasing number of ports and tourist destinations in Asia present tremendous growth opportunity for the cruise industry. Going forward, the company expects to continue profitably growing its presence in China and throughout Asia.

Meanwhile, the company is continually on the lookout for sailing to new destinations in order to drive demand for cruising. Already, the company had sailed to markets like Cuba, Mexico and Bermuda in 2016, where demand is expected to ramp up and boost revenues significantly.

Initiatives Undertaken to Boost Revenue Yields: 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.

Notably, the company is set to launch the world's first interactive guest experience platform – Ocean Medallion – on Regal Princess in the beginning of fall this year. Also, the company expects to complete the full rollout of its yield management system by year end, which will aid in driving incremental revenue yields over time. The new technology is expected to contribute in fiscal 2017, and even more meaningfully in fiscal 2018.

Meanwhile, Carnival believes that it is well positioned for continued earnings growth, given the current strength in its bookings. In fact, management noted that cumulative advance bookings for the next three quarters are well ahead of the year-ago level at significantly higher prices, at this point in time. Thus, based on current booking trends, the company expects fiscal 2017 net revenue yields in constant currency to be up approximately 3.5%.

Lower Fuel Consumption & Costs: We note that Carnival has been striving hard for the last few quarters to reduce fuel consumption as fuel is a major component for cruise companies. In fact, Carnival’s AIDAprima and AIDAperla are the first two cruise ships in the world to be powered by environment-friendly liquefied natural gas. The company is also replacing its older ships with more efficient vessels, which would help it to achieve its cost saving objectives.

Bottom Line

Does this mean that the company has been lying on a bed of roses? Well, not really!

Continual strengthening of the U.S. dollar against the functional currencies of the company’s foreign operations is likely to adversely impact the company’s results. Moreover, an increase in fuel prices may further prove detrimental to the company’s earnings growth.

Lingering global uncertainties in certain international markets has also been keeping growth at check. Meanwhile, increased investments in advertising, TV programming and other revenue generating opportunities would put pressure on near-term margins and earnings.

Besides, the company also faces competition from other cruise operators including Royal Caribbean Cruises Ltd. RCL and Norwegian Cruise Line Holdings Ltd. NCLH.

However, notwithstanding the headwinds, Carnival is well poised for growth given its global leader position in the cruise industry and an expected increase in demand for cruise travel throughout 2017.

Notably, over the last 60 days, the Zacks Consensus Estimate for Carnival’s current-quarter’s earnings has moved up 3.3%, reflecting eight upward revisions versus none downward. Also, its current-year earnings estimates have inched up 1.6%, on the back of six upward revisions versus no downward revision. All these positive earnings estimate revisions testifies the unwavering confidence that analysts have in the company and further adds to the optimism in the stock.

Another top-ranked stock in the same sector is Cedar Fair, L.P. FUN sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Cedar Fair’s current-quarter earnings climbed nearly 1%, over the past 60 days. Further, for 2017, EPS is expected to grow 12.7%.

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Carnival Corporation (CCL): Free Stock Analysis Report
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