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Carnival Stock Down 23% in 6 Months: Will it Bounce Back?

Zacks Equity Research

Carnival Corporation & Plc CCL is likely to gain from burgeoning demand for cruise travel, the addition of new ships to its fleet and current strength in its bookings. However, in the past six months, the stock has lost 22.7% compared with the industry’s 15.6% decline.

Notably, Trump administration's policy change on travel to Cuba, Hurricane Dorian, the tensions in the Arabian Gulf and the recent increase in fuel prices due to geopolitical events are likely to impact the company’s near-term results. Let’s delve deeper.

Factors Likely to Drive Growth

Carnival has adopted a strategy to grow beyond its familiar itineraries and capitalize on new markets. The Asian source market for cruises is expected grow significantly as it becomes more consumer-driven. Carnival is especially optimistic about the growth prospects of the Japanese and Australian markets. By 2020, China’s cruise market is projected to grow to 4.5 million passengers annually, up from 1 million in 2015, per data from the country’s Ministry of Transport. Also, by 2030, China is expected to become the world's second-largest cruise market, after the United States.

Meanwhile, Carnival continues to enjoy ticket price improvements for both its North American and EAA brands, with particularly robust ticket price improvements in its core Caribbean deployment. Additionally, it is steadily bolstering revenue yield growth by creating demand in excess of measured capacity growth through its ongoing guest experience, marketing and public relations effort.

The company is particularly positive on its recent innovations like the transformational new ocean experience platform, featuring: Ocean Medallion — a guest experience platform, PlayOcean — a proprietary mobile gaming portfolio, and OceanView — a proprietary digital streaming network. These new offerings are anticipated to accelerate and expand engagement, and step up the company’s already high guest experience delivery by leveraging its industry-leading scale.

Concerns

Changes in fuel prices and currency exchange rates are likely to hurt the company’s full-year earnings by 8 cents. Moreover, weather-related voyage interruptions, the tensions in the Arabian Gulf and a ship delivery delay are likely to have a negative impact of 4-6 cents in comparison to June guidance.

Considering the afore-mentioned factors, Carnival now expects 2019 EPS to be in the $4.23-$4.27 band, down from $4.25-$4.35 projected earlier. The consensus estimate for current-year earnings is pegged at $4.33. Net cruise revenues are likely to improve 4%, with 4.2% capacity growth.

Furthermore, earnings estimates for the current quarter and year moved south 25.8% and 1.4%, respectively, over the past 30 days, reflecting analysts’ concern surrounding the company’s earnings potential.

Carnival aims to make additional investments this year as its brands have identified further revenue-generating opportunities. Though these efforts are expected to benefit the company over the long run, these might weigh on the near-term margins and earnings.

Also, increased investments in advertising and TV programming are adding to the company’s costs. During the fourth quarter of fiscal 2019, net cruise costs (excluding fuel), per ALBD, are expected to increase by 4-5% compared with the prior-year figure (in constant currency). During fiscal 2019, the company expects full-year net cruise costs (excluding fuel), per ALBD, to be up approximately 0.3%.

Zacks Rank & Key Picks

Carnival has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include Cedar Fair, L.P. FUN, Live Nation Entertainment, Inc. LYV and Planet Fitness, Inc. PLNT. Cedar Fair sports a Zacks Rank #1 (Strong Buy), whereas Live Nation Entertainment and Planet Fitness carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cedar Fair reported better-than-expected earnings in three of the trailing four quarters, the average beat being 3.8%.

Live Nation Entertainment current-year earnings are likely to witness 411.1% growth.

Planet Fitness has an impressive long-term earnings growth rate of 22.6%.

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