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Carnival's Financial Buffet Leaves Investors Feeling Hungry

Rick Munarriz, The Motley Fool

Investors in Carnival (NYSE: CCL) (NYSE: CUK) may be reaching for the Dramamine after a poorly received financial report. Shares of the world's leading cruise line operator opened sharply lower on Tuesday after the company posted mixed results for its fiscal first quarter. 

Revenue rose 10.4% to hit $4.673 billion during the seasonally slow three months ending in February. Carnival hasn't historically been a speedy grower, but it has now come through with double-digit increases on the top line in three of the past five quarters. However, most of the revenue burst came from the effect of the adoption of new accounting guidance that padded the quarter's results by $323 million. Passenger ticketing revenue -- a line item that accounts for the lion's share of Carnival's results -- rose a modest 1.6% for the period. 

Pacific Jewel ship sailing on the ocean.

Part of the P&O fleet, owned by Carnival. Image source: Carnival.

Dropping anchor

Gross revenue yields -- a key gauge for measuring a cruise line's health that basically tracks the revenue per available lower-berth day -- rose 5.8%. Net revenue yields adjusted for currency fluctuations rose 0.5%, just above the flat results that Carnival was targeting on that basis three months ago. Carnival has routinely landed ahead of its guidance on that front.

Things aren't as kind on the bottom line at first glance. Adjusted net income -- essentially backing out the volatility of unrealized gains and losses on fuel derivatives and other net charges -- declined nearly 10% to $338 million, or $0.49 a share. Pesky fuel costs ate into Carnival's margins as gross cruise costs per available lower-berth day (including fuel) rose a stubborn 8.6% for the quarter. The silver lining of the otherwise rough bottom-line showing is that Carnival's own guidance was calling for adjusted earnings per share of $0.40 to $0.44 for the fiscal first quarter. 

Double-digit reported revenue growth and better-than-modeled adjusted earnings may not seem like the ingredients in a sell-off stew, but we haven't addressed Carnival's outlook. The cruise line operator sees flat net revenue yields on a constant-currency basis. It sees the changes in fuel prices and swings in foreign-exchange rates decreasing bottom-line results by $0.08 for the current quarter. And it sees adjusted EPS clocking in between $0.56 and $0.60, well below the $0.68 it delivered a year earlier. 

Carnival is also lowering its full-year forecast for adjusted earnings. It is now bracing investors for an adjusted profit per share of $4.35 to $4.55, less than the $4.50 to $4.80 it was projecting back in December. In short, the headwinds from currency turns and rising fuel costs are expected to continue beyond the current quarter. The revised guidance looks even worse when you consider that Carnival beat its fiscal first-quarter forecast by $0.05 to $0.09 a share. 

Bookings remain solid, and Carnival is sticking to its earlier revenue guidance. But the weakening picture at the other end of the income statement is naturally going to be problematic. There's never a dull day on the open seas.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.