It's time for Carnival Corp. (CCL 0.82%) to drop its quarterly anchor. The world's largest cruise line operator will announce its fiscal second-quarter results before Tuesday's market open. The bellwether will offer a sneak peek for how other cruise line stocks will fare later this summer, with Carnival's fiscal year ending a month earlier than those of its peers.
Buying ahead of a financial update isn't for the timid. Stocks move on earnings news, and Carnival shares are likely to be volatile following its earnings release and its subsequent conference call, which will start a half-hour into the trading day. There are plenty of good reasons to believe that Carnival will fare well, but let's also not lose sight of what can bring the shares lower.
NYSE: CCL
Key Data Points
1. The beats keep coming
Expectations are high for the industry's top dog in terms of revenue and passenger volume -- at least on the bottom line. Analysts are modeling $6.21 billion in revenue out of Carnival for the three months ending in May, a modest 7.5% increase. That follows an identical 7.5% year-over-year step up in the fiscal first quarter. Carnival was consistently posting double-, triple-, and even quadruple-digit top-line growth coming out of the pandemic until this fiscal year.
The real growth spurts are taking place at the other end of Carnival's income statement. Wall Street pros are targeting an adjusted profit of $0.24 a share. This is more than double -- 118%, to be exact -- what it served up during the fiscal second quarter of 2024. That may seem like an ambitious jump, but Carnival is more than up to the task. The leading cruiser has topped analysts' income estimates for each of the past 10 quarters since returning to operations after the industry's prolonged COVID-19-related shutdown.
The degree of the positive surprise has actually stepped up lately. Carnival has come through with at least double-digit percentages for seven straight quarters. Even better: Carnival has topped expectations by at least 94% in three of its past four results.
| Period | EPS Estimate | Actual EPS | Surprise |
|---|---|---|---|
| Fiscal Q3 2023 | $0.75 | $0.86 | 15% |
| Fiscal Q4 2023 | ($0.13) | ($0.07) | 46% |
| Fiscal Q1 2024 | ($0.18) | ($0.14) | 22% |
| Fiscal Q2 2024 | ($0.02) | $0.11 | 650% |
| Fiscal Q3 2024 | $1.15 | $1.27 | 10% |
| Fiscal Q4 2024 | $0.07 | $0.14 | 94% |
| Fiscal Q1 2025 | $0.02 | $0.13 | 485% |
Data source: Yahoo! Finance. EPS = earnings per share (adjusted).
It's unlikely the company will crank out another triple-digit surprise. Carnival is bumping up against last year's fiscal second quarter, which was only the second time that it turned a profit coming out of the pandemic. However, even a modest beat could send Carnival shares higher. It just can't afford to get seasick at the worst possible time.
Image source: Getty Images.
2. The stock is cheap
The strong improvement on the bottom line should slow dramatically from here. Carnival raised its full-year guidance in March, but it sill sees adjusted net income growing a little better than 30% for all of this year. This outlook follows earnings that more than doubled through the first half of this year, even if it falls more than a bit shy of the market's target for the current quarter.
Carnival is still cheap as its profit gains starts to normalize. It raised its fiscal 2025 earnings per share outlook from $1.70 to $1.83 per share in March, pricing the stock at a reasonable 13 times this year's earnings guidance. Like the first bullish reason to buy Carnival ahead of its telltale report, this one also gets better.
Carnival hasn't extended its outlook far enough to provide a read beyond next year, but analysts see it coming in at adjusted income of $2.16 a share. That translates to an earnings multiple of just 11 times next year's target. It's a low price to pay, and that's without accounting for how analysts continue to revise their estimates higher.
3. Cruise lines are coasting
Demand continues to grow for an interest in watery getaways, outpacing the industry's own buildout of more ships. Bookings for future sailings have never been stronger across all of the players in this space. Carnival announced in March that it has $7.3 billion in customer deposits for future sailings, a new record for the cruise line at that point of the fiscal year.
Momentum is bullish until it runs into some uncharted waters. That brings us to our final section, and it comes preloaded with a good reason to consider holding back until Carnival can say its piece on Tuesday morning.
Rough waves
Starting with the obvious, don't feel obligated to ever buy a stock just to get in ahead of a financial update. A single quarter doesn't make or break the investing trajectory for a long-term investor. Having said that, there are some reasons to be wary of diving into Carnival right now.
Carnival has a strong record of 10 straight bottom-line beats, the stock is trading for a forward multiple in the tweens, and the majority of Carnival's sailings for the rest of this year have already been booked. But that doesn't mean there's a pleasure cruise coming. Geopolitical tensions are rising, having escalated even over the weekend, and the last place a traveler may want to be at a time of uncertainty is on a floating vessel in the middle of the ocean. The volatility can also rock the economy, eating into the availability of discretionary income to go cruising. Pay attention to anything that Carnival may say about recent bookings. If there's any weakness there, a Carnival stock that's already up nearly 50% over the past year take a hit. I'm a Carnival investor and comfortable with the volatility.
I'm not selling, but I'm also aware of the potential near-term pitfalls here.
