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Balanced View on Carnival Corporation

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On May 2, 2014, we issued an updated research report on Carnival Corporation (CCL). This leading cruise operator posted fiscal first quarter 2014 results on Mar 25 with top and bottom lines beating the Zacks Consensus Estimate. The bottom line was also better than management’s expectation of a loss of 8 cents.

The better-than-expected performance reflects lower-than-expected net cruise costs that made up for the year-over-year revenue decline. Net cruise costs (in constant dollar) per available lower berth day increased 3.3% due to the increase in advertising expenditure. However, the increase was lower than the management’s growth anticipation of 4.5% to 5.5%.

On an adjusted basis, the company posted breakeven earnings results in the quarter, which compared unfavorably with the year-ago quarter earnings of 8 cents per share owing to higher operating costs. Total revenue declined 0.2% year over year due to drop in cruise sales, partly offset by increased onboard spending. Net revenue yields (in constant currency) also declined 2.1% year over year.

Though the company expects revenue yield to decline in fiscal second quarter 2014, it is expected to improve in the second half of the year driven by a better booking environment and higher ticket pricing. The company expects bookings to increase as a result of the marketing initiatives taken to increase its customer base.

The company plans to spend more than $600.0 million in 2014 on advertising, up 20.0% from 2012. Also, the company indicated that it has other offers for its guests in fiscal 2014. It continues to focus on enhancing its fleet by retiring old ships and adopting new technology. Going forward, such initiatives will help the company to achieve better revenue yield and improve profitability.

Moreover, the company has adopted a strategy to grow beyond its familiar itineraries and capitalize on Asian opportunities. In 2013, the company was successful in doubling its presence in China. The burgeoning Chinese middle class bodes well for the company’s cruise business. Management considers Asia a significant growth driver for the future and is set to expand fleet size in the region in future years.

Carnival’s ships have been facing one accident after another, significantly affecting its performance. In order to recover, the company has undertaken a series of initiatives. Although these initiatives have pressured the company’s profit, raising its costs at the current level, these are expected to prove beneficial in the long term.

Carnival Corp. presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the leisure industry include ClubCorp Holdings, Inc. (MYCC), Royal Caribbean Cruises Ltd. (RCL) and Regal Entertainment Group (RGC). All these stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on CCL
Read the Full Research Report on MYCC
Read the Full Research Report on RCL
Read the Full Research Report on RGC

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