Conditions earlier in the year indeed looked grim. Carnival reduced guidance a couple of times, blaming rapidly rising fuel costs and weak Caribbean booking trends, as hurricane worries continued to submerge travel to the region. Well, once again proving that near-term worries can indeed be short-lived, fuel costs have moderated lately, and Carnival posted third-quarter results above average analyst projections.
Sales advanced 8.3% for the quarter, while net revenue yield grew 1%. Net revenue yields are akin to same-store sales for retail companies and are an industry term that measures "net revenue per available lower berth day." CEO Mickey Aronson cited summer strength in Europe and Alaska, even though fuel and the Caribbean continue to be sore spots for Carnival.
He also guided to full-year earnings of $2.71-$2.73, a tighter range than the $2.65-$2.75 provided back in May, but still below the nearly $3 guidance from March. In any case, fuel costs will likely come down as the price of oil continues its decline, and hurricane activity has so far been uneventful, though the season just started. In addition, the longer-term outlook for cruise line operators is compelling.
The cruise-line industry is dominated by two key players: Carnival and Royal Caribbean
For starters, building a cruise ship is extremely expensive. It can cost more than $1 billion, resulting in significant capital needs, construction know-how, and subsequent high barriers to entry for any potential competition. Additionally, low cruise passenger penetration rates and favorable demographic trends could possibly provide avenues for new cruisers with lots of leisure time on their hands. Carnival estimates that only 16% of the U.S. population has ever taken a cruise, and the numbers are even lower in other countries, including those in Europe and Asia. Finally, the number of Americans 65 and older is estimated to double by the year 2050.
In the pure-play cruise-line space, Carnival is arguably the best-run and most profitable company, as compared to arch-rival Royal Caribbean. I don't think you can go wrong with either, considering that the cruise industry has grown about 10% annually since 1970, but Carnival may be your better bet. Overall, the growth trend in the industry has been steady, and should remain so well into the future. Fuel and hurricanes will always make for fluctuating quarterly results and investor sentiment, but Carnival has a steady track record of growth, and it dominates an industry with a wide economic moat and equally compelling long-term growth opportunities.
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Fool contributor Ryan Fuhrmann is long shares of Carnival and Royal Caribbean but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.