Will Carnival (CCL) Continue Its YTD Struggle with Its Q4 Earnings?

Carnival Corporation CCL is set to report its fourth quarter performance of its fiscal 2019 before the opening bell on Friday, December 20. The luxury cruise company has struggled to gain any traction in 2019 as its shares are down about 4%. The company has struggled to mitigate the economic headwinds in Europe and other international markets, which have contributed to the stagnant year.

Carnival Tries to Weather the Storm

Carnival has faced headwinds from a multitude of factors that has caused the company to lower its forward guidance in the past three quarters. The company cited weather-related voyage disruptions, a delayed ship delivery, and tensions in the Arabian Gulf as factors that will weigh on its bottom line this year. The luxury cruise giant also said that the changes in fuel prices and exchange rates have been detrimental to its profitability.

Q3 net revenue rose about 12% to $6.5 billion and net revenue yields (on a constant currency basis), which is a core industry growth metric, slipped less than 1%. Carnival has generally seen sluggish growth in its top-line but the third quarter marked the fifth double digit gain in the last seven quarters.

However, Wall Street didn’t take too kindly to net revenue yields hitting negative territory especially after the metric saw growth of 4% in fiscal 2018. The biggest drag came from the company's European cruises, which saw weak demand in places like Germany, the U.K., and southern Europe.

The economic picture in Europe has dimmed and Carnival doesn’t see it rebounding anytime soon, which is why management elected to focus on more affordable voyages in some European markets.

On the earnings front, Carnival posted adjusted earnings of $2.63, which was over an 11% gain from the year ago quarter. The headwinds in the international markets has hurt the stock since early 2018.

Outlook & Estimates

One of the biggest concerns for investors from the company’s third quarter report was its slashed guidance. In addition, management also said bookings over the last three months have been trending lower, both in terms of volume and pricing.

Carnival’s global sales base can usually mitigate issues in one or two markets but the challenges that are affecting demand in the Caribbean, Europe, and the Arabian Gulf markets have overwhelmed the company.

While the headwinds in the multiple markets have hindered the company’s performance, Carnival is no stranger to trying times. The company still generates over $5 billion in annual cash flow that it has utilized to finance the production of more ships. Management is planning to add capacity at a pace of 7% next year, which could help lift sales.

Our Q4 Zacks consensus estimates call for earnings in the fourth quarter to decline over 27% to $0.51 per share and for net revenue to pop over 3% to $4.6 billion.

Passenger ticket sales are projected to fall 1.47% to $3.19 billion, which is a decline from the 2.85% jump it saw in Q3. Onboard sales are forecasted to grow over 16% to $1.36 billion, which would represent a deceleration from Q3’s 41% hike. Net revenue yields (not on a constant currency basis) is anticipated to grow over 4% to $165 million, which is an improvement of the 2.3% drop in Q3.

Takeaway

Carnival has continued to struggle to stay in the green this year as the luxury cruise giant has faced a multitude of headwinds in the international market. Things don’t look too encouraging for the company in the short term, but if matters were to improve in some of the troubled markets, then Carnival could have its expansion efforts pay off.

This potentially uplifting long-term outlook could encourage shareholders to hold onto the stock during its current struggles, especially when considering the hefty 4.24% yield. The stock also trades for about 10X its forward earnings, which is well below the industry average of over 20X forward earnings. The favorable valuation perks could entice some, but investors should note that the stock is down over 15% over the past 52 weeks.

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