It’s been a stunning year for cruise liners and Carnival Corp (NYSE:CCL) would be the first to know. CCL stock, along with Royal Caribbean Cruises Ltd (NYSE:RCL) and Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) are enjoying one of the best first-half starts for the industry. Carnival is up 27% year-to-date, while the three cruise liners average 30.5% YTD.
What accounts for the dramatic rise? After all, CCL stock had a rather soft performance last year, losing investors 1% of market value.
A couple of factors are responsible, with the low-hanging fruit being the “Trump effect.” Since the Republican candidate won the election, Carnival soared nearly 36%. More importantly, both the financial and labor markets have responded positively to the President’s overtures to the business community.
More people with more money is certainly a net positive for CCL. Additionally, Americans are demonstrating true bullishness for travel. The clearest example of this is United Continental Holdings Inc’s (NYSE:UAL) robustness, despite beating one of its passengers senseless.
But the biggest impact of all is Cuba. When Obama opened the doors to diplomacy, it also opened up the cash registers. According to Bloomberg, Carnival and the two other majors “have added dozens of voyages to the island nation between now and 2019, betting that their floating resorts are perfectly suited to introduce tourists to the underdeveloped isle.”
However, the big question mark is now President Trump — who else? A few days ago, the Trump administration reversed several Obama-endorsed U.S.-Cuba policies. Needless to say, this sets up a nasty overhang, particularly as Carnival earnings are right around the corner.
Can CCL stock survive Trump and the competition?
Expect Cuba to Dominate Carnival Earnings Discussion
For the second quarter of fiscal 2017, Wall Street pegs Carnival earnings-per-share to come in at 47 cents. This is near the low-end of the estimate spectrum, which ranges from 45 cents to 51 cents. In the previous quarter, analysts targeted an EPS of 35 cents, whereas the actual result was 38 cents.
Overall, Carnival earnings are extremely reliable. Since Q2 FY 2014, CCL has a perfect record in beating out consensus. Even more impressive, Carnival has racked up an average positive earnings surprise of 59% during this time frame. Only a brave shot-caller will bet against the cruise liner. But in consideration of industry optimism, I doubt few will take the chance.
The most interesting aspect for CCL stock is what management will say beyond the numbers. As the Miami Herald reports, “Cruise lines and airlines stand to lose $3.5 billion and more than 10,000 jobs over the course of President Donald Trump’s four-year term if the administration fully rolls back all of the United States’ Cuba regulations.”
The $3.5 billion forecasted industry loss is no joke for Carnival, which earned nearly $2.8 billion last year. However, U.S.–Cuba Trade and Economic Council president John Kavulich believes that the Trump policy will be good for the cruise liners.
His argument is that President Trump’s crackdown on Cuban tourism will focus on, and negatively impact airliners. That’s because airliners had a tendency of transporting individuals with duplicitous agendas, according to Kavulich. Cruise liners, on the other hand, are family-oriented affairs.
For Now, Carnival Looks Like a Solid Buy!
Kavulich does have a point. After Trump’s Cuba policy was disclosed, Norwegian Cruise Line affirmed that it will continue its cruises to the Caribbean nation. The company stated, “We were very concerned about any potential changes, given how popular Cuba itineraries have proven to be with our guests, and we view this as a win for the cruise industry, our valued guests and travel partners.”
The wildcard is President Trump. For now, the new policy still allows for American tourists to travel to Cuba. However, the dynamic is fragile. The White House is very concerned about American citizens directly or indirectly funding the Castro regime. Given world events and the often hard-line posture that the administration has taken, Cuba cruises are anything but a guarantee.
Nevertheless, I expect plenty of positives from the upcoming Carnival earnings report. CCL benefits from tremendous industry tailwinds. Optimism is also running high, irrespective of Cuba. More Americans are in the mood to travel and vacation. If you’re Carnival, you couldn’t ask for anything more.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
