ii view: Higher fuel prices sink Carnival shares

Cruise operator Carnival has beaten results forecasts but lowered full-year earnings guidance.   

Third-quarter results ending 31 August 2019

• Revenue up 12% to $6.5 billion
• Net income up 6% to $1.8 billion
• Earnings per share up 11% to $2.63

Chief executive Arnold Donald said:

"I thank our 150,000 global employees for their efforts to deliver a record quarter in an otherwise challenging year. We achieved additional cost improvements largely driven by leveraging our scale, offsetting the earnings impact due to voyage disruptions from the combined impact of Hurricane Dorian, the tensions in the Arabian Gulf and the delayed delivery of Costa Smeralda."

ii round-up:

Carnival (LSE:CCL) is the world's largest global leisure cruise company. It operates over 100 ships, with 19 new ships scheduled to be delivered through to 2025. It visits over 700 ports globally. 

It is the only company in the world to be included in both the S&P 500 index in the US and the FTSE 100 index in the UK.

A downgrade to its full-year earnings guidance overshadowed better-than-expected third-quarter results. 

The recent spike in the oil and fuel prices due to events in Saudi Arabia underlay the cut to guidance. Adjusted earnings per share are now expected to be in the range of $4.23 to $4.27, down from a prior $4.25 to $4.35 and 2018 outcome of $4.26.

A recent slowdown in booking volumes and outlook comments for 2020 highlighting weakening economies impacting both its European and Asian businesses and the stronger dollar also injected caution. 

The share price fell by over 6% in late UK post results stock market trading. 

Earnings of $2.63 per share for the third quarter and above the consensus estimate of $2.53 were aided by favourable changes in the fuel prices. 

ii view:

As with airlines, cruise companies are both cyclical – subject to swings in the economy – and open to an array of other factors such as fuel prices, accidents and geopolitical tensions. Making their share prices often highly volatile. 

Longer-term structural trends, such as ageing populations and the desire for multi-destination holidays still arguably play into Carnival's hands. 

For investors, a near 30% fall in the share price over the last year alone underlines the choppy ride which can be endured. A prospective dividend yield of over 4% and covered more than twice by earnings, appears to offer some compensation, while a forward price/earnings (PE) ratio below both the three and 10-year averages suggests an undemanding valuation if earnings hold up.

Positives: 

• Taken delivery of the industry's first liquefied natural gas ship
• Targeting the Chinese market
• Undertaking a share repurchase programme

Negatives:

• Uncontrollable factors such as the weather and fuel prices can hinder performance
• Overcapacity and competition can hit pricing
• High-profile accidents can lower both public confidence in safety and reduce bookings

The average rating of stock market analysts:

Strong hold