It’s been rough sailing for Carnival Corporation (NYSE:CCL) this year. Carnival stock is up a mere 3.7% so far in 2018, and most of those gains have come in the past two weeks. That could change this week, however. The company is set to come into port to release its third-quarter earnings this Thursday.
The third quarter is the biggest of Carnival’s quarterly reports. As Vince Martin noted last week, Carnival “generated 31% of revenue and nearly half of its operating income in Q3” last year. The stakes are high.
Wall Street is anticipating a profit of $2.31 per share, up from $2.29 per share last year. Revenue is expected to rise 5.4% to $5.81 billion. What’s more, EarningsWhispers.com puts Carnival’s whisper number at $2.36 per share.
So far this year, Carnival stock has shown it’s up to the task. The company has bested Wall Street’s targets in each of the past four reporting periods by an average of 9.5 cents per share. What’s more, consumer spending has remained strong this year due to a booming economy and early effects of the new tax plan. In other words, Carnival should once again top analyst expectations.
The key lies with guidance. Interest rates are rising, with the Federal Reserve set to hike the central bank’s key lending rate by a quarter point this week. Inflation has remained steady, but wage growth remains below average. Additionally, oil prices are headed higher, hitting a four-year high of $81 per barrel this week.
With potential pressures on consumers rising and fuel prices gaining ground, Carnival needs to offer up solid guidance to remain on its current track higher.
Click to Enlarge There is another caveat to CCL stock’s rally. The shares are up more than 19% in the past two months. As a result, Carnival stock is now trading firmly in overbought territory. It’s 14-day relative strength index has blown past 70 and is hovering just shy of 80 at the moment.
While the stock’s gains appear solid, the oversold condition puts CCL at risk of a sell-the-news event following earnings. Downside support could arrive as early as $65, home to prior resistance, or as late as $63, which is home to Carnival stock’s 200-day moving average. Overhead resistance lies at $68 over the short term, and at $70 from a longer-term perspective.
Turning to the sentiment backdrop, Wall Street analysts are mostly positive on CCL stock. Currently, 15 of the 25 analysts following CCL rate the shares a “buy” or better. The stock is also trading at a discount of about 9.7% to the average 12-month consensus price target.
Options traders, meanwhile, are quite bullish on CCL. Currently, the October put/call open interest ratio rests at 0.31, with calls more than tripling puts among front-month options. That said, both peak call strikes ($62.50 and $65) are trading firmly in the money right now. There is little speculation that shares of Carnival will rally much higher over the short term.
Still, October implied volatility is pricing in a post-earnings move of about 4.5%. This places the upper bound at $69.80 — just shy of long-term resistance at $70 — and the lower bound at $63.80 — just above CCL’s 200-day moving average.
2 Trades for CCL Stock
Put Spread: Given CCL’s rally heading into earnings, I’m concerned that a better-than-expected report is already priced into the shares. This leaves guidance as the sole driver for a post-earnings rally. Anything short of a raise on guidance could elicit a selloff.
Because of this, traders might want to consider entering an Oct $65/$66.50 bear put spread. At last check, this spread was offered at 58 cents, or $58 per pair of contracts. Breakeven lies at $65.92, while a maximum profit of 92 cents, or $92 per pair of contracts is possible if CCL closes at or below $65 when October options expire.
Call Spread: Should Carnival raise guidance or offer up a positive outlook for the rest of the year, the rally could have legs to continue. Traders looking to bet bullish on CCL stock may want to consider an October $67.50/$70 bull call spread. At last check, this spread was offered at 85 cents, or $85 per pair of contracts. Breakeven lies at $68.35, while a maximum profit of $1.65, or $165 per pair of contracts, is possible if CCL closes at or above $70 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.