In my earnings preview of Carnival Corporation's (CCL 3.56%) fiscal third-quarter 2019 earnings report earlier this month, I asked rhetorically if the company was due for yet another earnings-related bout of selling from external factors. The cruise line holding company released earnings Thursday morning, and the answer to the question appears to be "yes," as shares were down 8% at midday. As we unpack investors' reaction to the report and walk through details from the last three months, note that all comparative numbers below are presented against the prior-year quarter.
Carnival: The raw numbers
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $6.53 billion | $5.83 billion | 12% |
| Net income | $1.78 billion | $1.71 billion | 4.1% |
| Diluted earnings per share | $2.58 | $2.41 | 7.1% |
Data source: Carnival Corporation.
What happened this quarter?
- Net revenue yields (net revenue divided by total available passenger cruise days) decreased by 0.5% in constant currency terms, consistent with the company's previous guidance that yields would be "flat to down slightly."
- Favorable changes in fuel prices during the quarter of $0.07 per share were completely offset by a foreign currency impact of $0.07. The company had forecast a combined favorable lift of $0.03 per share between fuel prices and foreign currency translation for the third quarter.
- Earnings per share (EPS) exceeded management's targeted range of $2.50 to $2.54. Adjusted EPS of $2.63 increased by 11.4% over the prior-year quarter's $2.36 in adjusted earnings.
- Carnival was able to absorb a $0.06 EPS impact from voyage disruptions in the Bahamas due to hurricane Dorian (which made landfall just after the Aug. 31 quarter-end), "tensions" in the Arabian Gulf resulting from the bombing of Saudi Arabian oil production facilities, and delays in delivery of a new vessel, the Costa Smeralda. Management cited cost savings stemming from the company's greater operating scale versus the prior-year quarter as the primary offset to these earnings headwinds.
Image source: Getty Images.
A revised fiscal 2019 outlook
For the second consecutive quarter, Carnival decreased its full fiscal-year guidance. As I had explained in my preview, temporarily reduced output from Saudi Arabia has pushed up global oil prices. Thus, shareholders had already anticipated an earnings impact on the remainder of fiscal 2019; the only question was the extent of the company's anticipated revision.
Carnival today quantified an $0.08 drag from higher fuel prices next quarter and consequently recast full-year EPS estimates to between $4.23 and $4.27, against the previous range of $4.25 to $4.30.
At the midpoint of both ranges, the total change to EPS is a mere $0.05. Investors' gloom is more likely originating from a preliminary look at fiscal 2020. Carnival reported that while cumulative bookings for the first half of 2020 are outpacing 2019 bookings at prices in line with the previous year, since June, both booking volume and prices have trailed the comparable period.
Moreover, in order to comply with new regulations by the International Marine Organization (IMO) limiting sulfur content in marine fuels, Carnival is planning to increase the percentage of marine gasoil, or MGO, in its fuel consumption next year. As a result, the cruise line informed investors that its total expected fuel purchases next year will top $1.8 billion, versus $1.6 billion in fiscal 2019.
The effect of the current-year earnings recast and an initially sober view of fiscal 2020 have translated into additional selling pressure on the "CCL" symbol, which has shed 33% of its value over the last 12 months. Shares now trade at just 9 times forward earnings, and the stock price depreciation has pushed an already handsome dividend yield to 4.7% on an annualized basis. Carnival has nearly entered value stock territory; given its long-term potential for earnings expansion, I've added it to my Motley Fool CAPS portfolio today.
Management's perspective
CEO Arnold Donald's overview of multiple current headwinds, found within Carnival's earnings press release, is worth reading in full. Donald cites the numerous factors we've discussed above and alludes to Brexit-induced uncertainty to boot. But he also provides those with an extended investment horizon reason to consider taking a position in Carnival stock at its current levels:
As a truly global cruise company, with nearly 50 percent of our guests sourced outside of the U.S., we are facing a number of current headwinds, including weakening economies affecting our Europe & Asia segment, a strong dollar and of course, the IMO 2020 regulations, and we are working to mitigate them. We have taken actions to bring capacity in Southern Europe more in line with demand, reflecting the current conditions which have been heavily influenced by ongoing economic malaise, the uncertain geopolitical environment and recent trends in consumer confidence. We have also made close-in deployment changes, including those made to address the recent situation in the Arabian Gulf, which has had an impact on recent booking trends and ticket prices. While we are subject to uneven economies in the short run, the global aspect of our business has proven to be a strength over time, producing our industry leading position with over $5 billion in cash from operations, attractive returns on capital and the strongest balance sheet in the industry.
