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Carnival’s (CCL) Expansion Efforts on Track, Costs Rise


Carnival Corporation’s CCL continual expansion efforts and other revenue yielding strategies seem encouraging. However, higher costs along with negative currency translation continue to be potent headwinds.

Last month, Carnival reported better-than-expected fourth-quarter fiscal 2017 results. Earnings of 63 cents per share beat the Zacks Consensus Estimate by 13 cents but were down 6.3% year over year. Revenues of $4.3 billion beat the consensus mark by $108 million and rose 8.2% year over year.

Earnings also surpassed the consensus estimate in each of the trailing four quarters, the average positive surprise being 12.33%.

We observe that over the past year, the company’s shares have rallied 23%, outperforming the industry’s gain of 20%.

Launches & Expansion to Drive Demand & Sales

Carnival continues to introduce flagships to drive demand. With frequent launches, the company aims to build capacity growth that allows its global fleet to meet escalating demand for cruise vacations around the world.

In a recent press release, Carnival announced plans of launching four cruise ships this year as part of its current fleet enhancement strategy. While Carnival Horizon (belonging to Carnival Cruise Line brand) and Seabourn Ovation (Seabourn) will be launched in April and May, respectively, AIDAnova (AIDA Cruises) and ms Nieuw Statendam (Holland America Line) are slated for a December launch. Carnival has 18 new ships scheduled to be included in its portfolio of leading global cruise brands between 2018 and 2022.

In fact, launching ships is part of the company’s long-term strategy to build state-of-the-art vessels which would help the company drive guest traffic. Moreover, Carnival continues to invest in its fleet to enhance guest experience.

The leading cruise company is focused on growing beyond its familiar itineraries and capitalizing on new markets. The Asian source market for cruises is expected to grow significantly as it is becoming more consumer-driven. Carnival is especially optimistic about the prospects in China, Japan and Australia.

Further, the company forayed into the markets of Cuba, Mexico and Bermuda where demand is expected to ramp up and boost revenues significantly. In fact, Carnival Cruise Line’s Carnival Paradise is the largest ship sailing from the United States to Havana and is capturing attractive ticket price premium. Carnival has more sailing scheduled to Cuba than any other major U.S. operator. This should help meet increased demand.

The company is also focusing on port development to make use of its industry-leading scales to create better guest experiences. In this regard, the company recently signed a deal to construct a cruise port facility on the Grand Bahama Island.

Strategic Initiatives Boost Revenues

Carnival continues to drive revenue growth by creating more demand than the estimated capacity growth through improved guest experience. In fiscal 2017, Carnival’s ticket prices increased 4.5%.

The company is particularly positive on recent innovation like the transformational new ocean experience platform, featuring: Ocean Medallion, a guest experience platform, PlayOcean, a proprietary mobile gaming portfolio, and OceanView, a proprietary digital streaming network. These offerings are anticipated to enhance guest experience further by leveraging on its industry-leading scale.

Meanwhile, the company believes it is well positioned for continued earnings growth, given the current strength in bookings, particularly in Caribbean, Alaska, Europe, Asia and Australia. In fact, management noted that since November, booking volumes for 2018 have been exceeding that of last year at higher prices. Moreover, cumulative bookings for 2018 are well ahead of last year on both price and occupancy. Banking on its yield management system, the company expects revenue yields (in constant dollars) to continue improving in fiscal 2018.

Moreover, to improve brand perception, Carnival is promoting its brands through documentaries, television programs, motion pictures and digital initiatives. Recently, the company created four original TV programs in order to engage viewers.

High Costs & Other Macro Woes

Carnival aims to make additional investments this year as its brands have identified more revenue generating opportunities. Though these efforts are expected to benefit the company over the long run, these would put pressure on near-term margins and earnings. Also, increased investments in advertising and TV programming are driving costs.

Moreover, with a major portion of its revenues coming from Asia and Europe, the company is exposed to the impact of negative currency translation. Continual strengthening of the U.S. dollar against the functional currencies of the company’s foreign operations is likely to impact results. Additionally, higher fuel prices are likely to impede earnings growth.

Zacks Rank & Stocks to Consider

Carnival has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Consumer Discretionary sector are Clarus Corporation CLAR, Las Vegas Sands Corp. LVS and Melco Resorts & Entertainment Limited MLCO. While Clarus sports a Zacks Rank #1 (Strong Buy), Las Vegas Sands and Melco Resorts carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Clarus, Las Vegas Sands and Melco Resorts’ 2018 earnings are expected to improve 247.2%, 3.2% and 19.8%, respectively.

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