It's time for Carnival (CCL -0.42%) (CUK -0.55%) to make its quarterly port of call to the not-so-private island of financial reality. The world's largest cruise line operator will announce results for its fiscal third quarter, ended in August, on Friday morning. Investors hope it's the cure that will put an end to the industry's bout with seasickness lately.
The market's holding out for major year-over-year improvement, and that's not a surprise since only a limited number of ships across Carnival's many fleets were on the high seas last summer. An analyst also boosted his price target on depressed Carnival stock, and it's usually an encouraging indicator when Wall Street adjusts its outlook for the better ahead of a telltale business update.
Which way will Carnival sail after the fresh numbers come out? Let's take a closer look to see why it's OK to be cautiously optimistic about the cruising industry bellwether this week.
Image source: Getty Images.
Crashing waves
It hasn't been easy for Carnival investors. The stock has fallen 56% this year, hitting its lowest close in nearly two months on Monday. You would expect a stock that loses more than half its value in a year to be reeling, but Carnival is navigating these tricky waters just fine. Analysts see revenue popping sevenfold to top $500 million, a figure that's been inching higher lately.
Wall Street's holding out for a much smaller quarterly deficit than the prior year's red ink, and things could be even better. Some of the more optimistic analysts are eyeing a profit for the three months ending in August. It would certainly be comforting for Carnival to deliver positive net income after 10 straight quarters of losses, but the trend isn't kind when it comes to recent updates.
| EPS (estimate) | EPS (actual) | Surprise | |
|---|---|---|---|
| Q3 2021 | ($1.25) | ($1.55) | (24%) |
| Q4 2021 | ($1.27) | ($1.52) | (20%) |
| Q1 2022 | ($1.00) | ($1.57) | (57%) |
| Q2 2022 | ($1.14) | ($1.63) | (43%) |
Source: Yahoo! Finance.
Investors have seen nothing but larger-than-expected losses over the past year. This isn't the kind of momentum that those long a stock like to see, but business has clearly picked up for the industry during the critical summer season. A lot of people have returned to cruising. The real question is if the surge in passengers can scale to the point of turning the corner on the bottom line.
Most input costs are higher than they were a year ago, but there has been sequential relief in energy and some food costs. Even the most pessimistic of analysts is targeting a loss of just $0.60 a share, considerably kinder than the deficits of at least $1.50 per share in each of the past few reports. Carnival managing to not only beat Wall Street's consensus of $0.13 a share but to deliver an actual profit would be great moment for the cruise line. It would also likely boost the shares of its competitors that have fiscal quarters ending a month later.
Truist Financial analyst Patrick Scholes lifted his price target on the stock from $8 to $10 last week. He still has a sell rating on the stock, but his channel checks are showing whiffs of optimism. Announcements last month of easing of vaccine and testing rules are driving booking volumes higher. Later this week Canada will be the latest country to drop most travel safety protocols, making it easier for travelers to come and go.
Scholes still has his concerns -- hence the sell rating. Cruise line operators took on a lot of new debt or issued new stock to get through the operating lull. The leverage is problematic in this climate of spiking borrowing costs and the equity offerings will dilute the earnings recovery on a per-share basis. However, there's no denying that a strong report out of Carnival -- and equally upbeat comments about future booking trends -- can lift the entire industry higher in a few days. It's time to see how seaworthy the cruise line stocks were during the telltale summer season.
