Yesterday, Carnival (NYSE:CCL) once again reduced 2006 guidance, this time blaming lower revenue yields, increasing fuel costs, and a change in dry-dock accounting. As a result, it now expects full-year earnings of $2.65 to $2.70 per share, or about flat with 2005 earnings of $2.70. Second-quarter earnings are expected to be $0.43 to $0.45. But let's get a deeper look into the pre-announcement.
Caribbean bookings continue to be weak; they're hurting net revenue yields, an industry term that measures "net revenue per available lower berth day." They're the cruise-line equivalent to same-store sales stats for retail stores. Carnival now projects net revenue yield to rise only 1% to 2%, versus a previous estimate of 2% to 3% for the second half of the year. This will shave an estimated $0.10 off earnings. Also, fuel costs keep rising; they're expected to cut an additional $0.07 off full-year earnings for a whopping total fuel hit of $0.32 per share, or near 10% of original guidance.
For good measure, why not throw in an accounting change? Dry-dock costs will now be expensed, rather than amortized over two to three years. This is expected to decrease 2006 earnings by $0.08 for the full year, but it's likely a more conservative stance, since costs will be charged when incurred. On another slightly positive note, currency exchange rate developments are expected to benefit earnings to the tune of $0.04 for 2006.
This warning comes on top of a reduction in earnings during first-quarter results back in March, where earnings guidance for the year originally stood at about $3 per share. So what's the deal, and why does the company keep ratcheting down earnings?
As I mentioned after first-quarter earnings, Carnival's results will always be influenced by changes in the weather, fuel, and geopolitical events, or items outside of its control. It is also subject to the whims of consumer confidence as it operates in the leisure industry: People take vacations and go on cruises when they have larger amounts of discretionary income. Currently, higher interest rates and gas prices are taking a bite out of people's willingness to spend on travel, especially to the hurricane-prone Caribbean, and higher fuel prices for Carnival's ships are killing earnings.
However, the long-term story remains intact, as alluded to by CEO Mickey Arison in yesterday's press release. The cruise industry is effectively a duopoly between Carnival and Royal Caribbean (NYSE:RCL). They will continue to grow and gain demographics in their favor, and Carnival is the stronger of the two. In my review of Carnival's first-quarter earnings, I pointed out that it has a more conservative balance sheet and higher net margins than Royal Carribean. While Royal Caribbean tends to spend more money on decking out its ships, Carnival is actually a better investment -- it satisfies customers while maintaining greater profitability.
No need to throw out the life preserver yet -- Carnival's strong fundamental business should duly reward long-term shareholders. There's no hurry to buy the shares, since 2006 has largely been written off by investors who only look 12 to 18 months in the future. But further out past that time frame, Carnival should enjoy smooth sailing.
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Fool contributor Ryan Fuhrmann has no financial interest in any shares mentioned. Feel free to email him with feedback or to discuss the company further.
