Carnival (CCL 1.73%) shares saw a nice 8% pop after the company reported its fourth-quarter earnings on Friday. The cruise company's results topped analyst expectations, with reported fiscal fourth-quarter adjusted earnings per share of $0.62 on $4.8 billion in revenue, versus analyst estimates of $0.50 in adjusted earnings on $4.57 billion in revenue. Net revenue yield decreased by 1.8% year over year on a constant currency basis, versus expectations of a 2% to 3% drop.
After a series of company downgrades of its full-year guidance in 2019 that had shares trading near multiyear lows, investors were pleased with the latest earnings beat and fiscal 2020 guidance that was on the higher end of expectations.
The world's largest leisure travel company is still facing several headwinds that have been plaguing it for the past few quarters, but guidance for fiscal 2020 and strong bookings figures impressed. Management cited economic slowdowns in key European markets and the unfavorable Cuba regulatory change as 2019 headwinds that are likely to continue in 2020. Carnival's North American and U.K. markets continue to see strong demand.
Here's a look at three drivers for the company's post-earnings move up.
Image source: Carnival.
1. Strong 2020 guidance
Carnival provided guidance for its fiscal 2020 earnings per share of $4.30 to $4.60, versus analyst expectations of $4.37. That's a marked improvement after it lowered its outlook multiple times this year. Net revenue yields are forecast to decrease by about 1.5% in fiscal 2020, slightly higher than the 1.8% decrease in the fourth quarter. The company is also controlling costs by disposing of less efficient ships and focusing on larger, more efficient ships. Global sourcing also helped Carnival achieve "over $125 million of cost savings in 2019." Another factor helping earnings growth is lower fuel costs, which are forecast to be $1.42 billion in 2020, compared with $1.56 billion in 2019.
CEO Arnold Donald provided more explanation on the conference call. "Based on current booking trends, we expect 2020 net cruise revenues to be up approximately 5% with capacity growth of 6.6%, while net revenue yields are expected to decline approximately 1.5%," he said. "Similar to 2019, the 2020 net revenue yield decline is driven by the challenging economic environment facing our Continental European brands.".
2. Record booked occupancy levels
The largest cruise ship company has reached a record level of booked occupancy at the start of fiscal 2020, with cumulative advanced bookings for 2020 slightly ahead of the prior year, indicating a strong demand for its offerings. Management also noted that booking volumes improved over the past eight weeks, assisted by the bounce-back from Caribbean bookings that were affected by Hurricane Dorian.
CFO David Bernstein elaborated: "We are entering fiscal year 2020 with a record booked occupancy position. At this point in time, our cumulative advanced bookings for the full year 2020 are slightly ahead of the prior year on occupancy, with a 6.6% capacity increase at prices that are slightly lower than last year on a comparable basis."
3. Long-term outlook and attractive valuation support shares
Carnival's long-term growth outlook is strong, given U.S. demographics, low penetration levels of cruise vacations, and the attractive value proposition of its offerings. In 2019, there are 72 million baby boomers in the United States, and this demographic is traditionally the target audience for cruise companies. In addition, less than 4% of U.S. consumers have been on a cruise, according to Morningstar.com. In Europe, it's less than 3%. That leaves Carnival plenty of opportunities to attract new customers in key markets.
While Carnival's management believes the company's "cruise brands will be recession-resilient," its revenue growth would probably be crimped in an economic slowdown. People usually cut back on discretionary spending, such as travel and restaurant meals, in a recession. However, the travel company's broad global footprint may help in the case of a contraction in one part of the world. Nearly 50% of Carnival's revenue comes from outside the United States. It can also redeploy its cruise ships to different areas with higher demand.
Finally, the valuation of Carnival shares looks attractive. Shares trade at just 11 times forward earnings, below the S&P 500's average of 20 and the consumer discretionary sector's average of 25. The stock also offers a 4.2% dividend yield. These factors, plus a healthy long-term growth outlook, could help investors look past the short-term headwinds for the stock.
