Whether or not Carnival Corp. (CCL) — better known as Carnival Cruise Lines — did well in its fiscal third quarter of 2015 is largely a matter of perspective. But given that CCL stock has fallen nearly 4% following the release of Carnival earnings report released this morning, the market’s perspective is clearly a bearish one, interpreting the weak Q4 profit guidance as a sign of trouble ahead.
Such a lull can’t be entirely surprising, all things considered. While the company posted measurable growth numbers again last quarter, newcomers to the stock have paid a fairly high price for it; CCL stock trades at a trailing P/E of 22.9. Stocks priced at such valuations generally can’t afford to leave any doubt as to their value and potential, as CCL just did.
And yet, when one scours the company’s fiscal Q3 accounting statements, it’s tough to argue the company isn’t moving in the right direction. Sure, it’s moving at a snail’s pace, but it’s moving forward.
Carnival Earnings Results for Last Quarter
Current and would-be owners of CCL stock have had a tough time getting a grip in the company’s true performance in the past year. That’s because Carnival has been facing the headwind of a strong U.S. dollar, and enjoying the tailwind of cheap fuel … one of the bigger expenses in operating passenger ships.
Fortunately, Carnival calculates its results on a constant-currency as well as an actual-exchange-rate basis, and it breaks down its fuel as well as its fuel-hedging costs.
On a constant-dollar basis, the amount of revenue the company generated per cabin grew 4.3%. Simultaneously, the cost to supply and serve each ship’s room fell 1.0% on a constant-currency basis.
And, perhaps most encouraging of all, the number of vacationers who stepped on board a Carnival ship last quarter totaled 3.068 million, versus 2.983 million for the same quarter a year earlier. They also spent more while on board … about 1.6% more, which is doubly impressive in light of unfavorable exchange rates.
It was that same unfavorable exchange rate, however, that untimely crimped the company’s top line. Despite carrying more passengers during fiscal Q3, total ticket revenue actually fell from $3.72 billion to $3.63 billion.
Fairly or not, the only results the market really cares about right now are the ones achieved with the currency-exchange scenario we have now — not the one we had a year ago.
To that end, non-GAAP earnings of $1.75 per share on a total of $4.88 billion in revenue topped earnings estimates of $1.63 per share of CCL stock, and topped revenue estimates of $4.81 billion. Per-share profits were up nearly 10%.
Still, total revenue was down from the year-ago tally of $4.95 billion, again with the pesky high-priced dollar considerably undermining the company’s efforts. Total net income fell a bit, from $1.24 billion to $1.22 billion, with the bulk of that swing created by a fuel hedge that simply didn’t move in Carnival’s favor.
Bottom Line for CCL Stock
The many moving parts involved in handicapping CCL stock are even tougher to get a bead on in the shadow of a Q4 outlook that was considerably worse than expected.
As of today, Carnival Corp. says it’s only looking for a profit of 36 to 40 cents per share for the current quarter, falling well short of the consensus profit of 45 cents per share of CCL stock.
Clearly the market is less than pleased with the company’s lack of optimism. But, those same investors may want to embrace the fact that Carnival is simply low-balling its outlook to ensure a solid earnings beat when it reports fourth-quarter results three months from now … which would prolong a multi-year streak of quarterly earnings beats.
Perhaps even more compelling is the distinct possibility that Carnival is finally making its way back to being a big enough operation that scale actually matters … in the sense that margins widen as the top line grows.
It would certainly be a welcome change. After revenue plateaus in 2011, profit margins began to shrink in earnest. They took a slight turn for the better last fiscal year, widening to 7.8%.
We have yet to see if that was a fluke or not, but so far, net margins have rolled in at 9% over the past 12 months. We really need one or two more good quarters for the clues to become a convincing reality, but it’s starting to look like Carnival has turned the corner.
And as for the U.S. dollar and fuel prices, though investors tend to be consumed by them in their efforts to get a grip on what CCL stock should be worth, in the end, that may be wasted time. The two tend to offset each other’s effects. Investors would be best served by looking at per-berth onboard spending trends, which showed a measurable if not remarkable progress last quarter.
In other words, you could do a lot worse than owning CCL.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
