Carnival Has Short-Term Chop, Long-Term Tailwinds

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Carnival Cruise Lines (NYSE: CCL  ) is attracting far too many puns today over earnings that sank lower than expected. The company barely broken even in the recently ended quarter, as continued jumps in marketing expense mitigated the nearly flat year-over-year sales. It's been a long path to recovery since Carnival was hit with PR nightmares such as the Costa Concordia sinking and the infamous "poop cruise." The company has had to work relentlessly to rebuild its brand, and has done a pretty good job of it in a relatively short amount of time. Investors interested in the company need to remain focused on the long-term tailwinds and deal with this year's recovery period.

Slow boat
The non-GAAP bottom line for Carnival's fiscal first quarter came in at just $2 million, or $0 per share. Management was quick to mention that the flat results were better than expected due to some premium ticket pricing and strength in non-U.S. operations. Fuel prices were down, though so was net revenue per ALBD (average lower berth day, similar to a same-store sales metric).

For the current year, the company is seeing greater booking volume, though lower year-over-year pricing. Management cited global advance booking volume up 20%. Net revenue per ALBD will likely remain negative for the full year, but the company expects the numbers to drift into positive territory by the second half of the year. Non-GAAP EPS is expected to be in the range of $1.50-$1.70 per share -- narrowed from previous guidance and a bit underwhelming, considering 2013's EPS of $1.58 per share.

The market clearly didn't like the idea of flat earnings for the year, or the possibility of a net loss in the current quarter (management guided for anywhere between a loss of $0.02 per share to a gain of $0.02 per share), but the guidance is not indicative of lowered demand. Moreover, the long-term growth opportunity here is tremendous.

Sea change
It's an overused thesis, but it actually applies here -- Carnival can fuel international growth with the China market leading the way. The company is investing in more offices and increasing its various brands' awareness in the country and surrounding areas. As the Chinese middle class expands at a rapid rate and people develop disposable incomes, cruises are an affordable and appealing method of vacation.

Carnival's European business, despite being dangerously close to the Costa Concordia disaster, is gaining traction at an appealing rate.

Perhaps most important, the company has rock-solid fundamentals. For such an asset-heavy business as a cruise line, Carnival has a comfortable debt portfolio -- just under $8 billion. For a company that hauls in quarterly sales of $3.5 billion during a recovery period, this a very manageable debt load and allows for swift expansion, which the business is certainly doing.

When all is well, it's easy to be good at what you do. A better test of management credibility is during times of crisis. Carnival rebounded from what could have ruined the brand. There was a quality control issue and the company fixed it. Management owned up to mistakes and pushed forward, as should always be done but often isn't. The bottom line is: Carnival is a business built to sail in the long term.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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8/28/2015 4:02 PM
CCL $49.50 Down -0.24 -0.48%
Carnival Corp CAPS Rating: ***