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Carnival Corporation (NYSE:CCL): Visible Signs Of Recovery Bodes Well For The Stock

 January 03, 2014 08:51 AM

Cruise and vacation company Carnival Corporation (NYSE:CCL) should have a good year in 2014 on improved bookings and ticket prices. Further, the company's brand-building efforts and other promotional moves are expected to bear fruit this year.

The company's portfolio of cruise brands includes Carnival Cruise Lines, Holland America Line, Princess Cruises and Seabourn in North America; P&O Cruises (UK), and Cunard in the United Kingdom; AIDA Cruises in Germany; Costa Cruises in Southern Europe; Iberocruceros in Spain; and P&O Cruises (Australia) in Australia.

Shares of CCL gained about 6 percent since reporting solid results for its fourth quarter when the company reported better-than-expected numbers despite declining year over year.

[Related -Carnival Corporation (NYSE:CCL) Q4 Earnings Preview: Rough Seas Ahead]

The biggest upside should come from the Costa brand, which saw its first quarter of positive pricing since the Concordia in January 2012, and saw yields increase double-digits.

Why is that relevant? The most important thing here is that if Costa can recover to a double-digit degree, then CCL should also be able to recover from Carnival brand's image issues from a far less serious issue.

UBS analyst Robin Farley said Costa was comping against a yield decline of more than 20 percent in the second half of 2012, but it is still encouraging to see price recovery for the first time.

Farley believes the price may have been half of the Costa yield increase in the fourth quarter and occupancy was also half, so he views mid to high single digit price recovery in the fourth quarter positively.

[Related -Bullish Activity Detected In Staples, Inc. (SPLS) Options and Bearish in Carnival Corporation (CCL)]

The "holding price" strategy for the Carnival brand seems to be working as close-in fourth quarter booking for the brand is what drove yield upside to expectations in the quarter.

Given the positive impact that has had on bookings, investors shouldn't be surprised to see it continue in the first quarter. The "hold price" strategy also benefits competitors in the sector since Carnival, as the largest brand in the Caribbean, can significantly affect the overall price environment.

Cumulative 2014 bookings are behind last year with prices in line with 2013. But booking volume since September is well ahead year-over-year; although, at lower prices. So, CCL has made up a couple hundred basis points of load factor in the last few weeks.

For the third quarter, cumulative fleetwide occupancy is similar to last year while pricing is flat, which should mean higher yields year over year even with the increase in Caribbean capacity in the market that will begin in the second quarter.

Farley noted that comparing bookings today to the same time last year won't yet have the negative impact of Triumph in the base yet, so even if booking price stays flat, the base for 2013 will start to move lower as CCL moves through the second quarter and anniversary those issues

The company expects net cruise costs excluding fuel per ALBD for the full year 2014 to be slightly higher than the prior year on a constant dollar basis. Taking the above factors into consideration, the company forecasts full year 2014 non-GAAP earnings per share to be in the range of $1.40 to $1.80, compared to 2013 non-GAAP earnings of $1.58 per share. This higher 2014 base of EPS underpins 2015 outlook as the market has been looking past 2014 as a year of recovery.

Yield guidance for "down slightly" for 2014 is below flat expectations for guidance with the consensus estimate of 1 percent growth. Guidance is for first quarter yields to be down 3-4 percent, with overall first half down 3-4 percent. The company sees yields turning positive in the second half, but up less than the 3-4 percent decline in the first half, to get to just below flat.

There is likely upside to CCL's guidance and yields could be just above flat rather than just below. With fiscal 2013 yields down 2.6 percent, CCL is now cumulatively 10 percentage points below peak 2008 yields in constant currency.

The real upside versus 2014 expectations is on the expense side, with net cruise costs ex fuel to be "slightly higher" versus Street's 3.1 percent, and management's previous suggestion of something in the 3-4 percent range for an increase.

Farley said lower fuel prices and better fuel efficiency, with 4 percent lower fuel consumption next year, will help expenses.

The company is catching up on booking volumes and gaining momentum as it enters 2014. The compelling value in the marketplace will continue to stimulate strong demand leading to a solid wave period. With over 100 ships and more than 10 million guests, CCL does have a scale advantage that cannot be replicated in this industry.

CCL stock trades 17.6 times its forward earnings. They have gained 8 percent in the last year and traded between $31.44 and $40.47 during the past 52-weeks.



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