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Morningstar | Higher Fuel, Foreign Exchange, and Weaker European Consumer Sink Carnival’s 2019 Outlook

Narrow-moat Carnival’s full-year outlook was lowered on the heels of foreign exchange and fuel headwinds (to the tune of $0.22), with the company forecasting full-year 2019 earnings of $4.35-$4.55 versus $4.50-$4.80 previously, significantly lower than our $4.74 prior 2019 estimate. While we are generally unfazed by external factors exerting force on profitability, more concerning was commentary that Europe and Asia brands are booked ahead of the prior year but at lower prices. Given that uncertainty surrounding Brexit has led to local consumer uncertainty (commentary that has been pervasive in other consumer company reports) and that Italy had entered a technical recession at the end of 2018 (the key sourcing market for Costa), we expect pricing pressure from foreign sourced cruisers could persist over the next few quarters--and expect to lower our $69 fair value estimate by a mid-single-digit rate in response--but still view shares as undervalued.

We surmise shares have tumbled on the trouble Carnival is beginning to exhibit on taking pricing, with pricing on bookings since January in line while booking volumes are ahead compared with the prior year. However, we note that yields rose more than 4% and 5% in 2017 and 2018, respectively, well above the 1% average as-reported yield growth Carnival has captured since the Great Recession, making it difficult to lap such robust growth. We don’t plan any material change to our long-term outlook that includes average yield growth and cost growth of 2% and 1%, respectively, as we incorporate improving pricing from revenue management efforts and controlled costs via better sourcing, fuel efficiencies, and other initiatives.

First quarter adjusted earnings per share of $0.49 were about a dime above our forecast, with as-reported yield declines of 2.5% ahead of the 3% shortfall expected. Here, the ticket component declined 4% on an as-reported basis while the onboard increased 1% (marking the first quarter the ticket component of yield has declined since the final quarter of 2015). Costs ex-fuel were also below the initial forecast, down 1.6%, but we believe this is a result of the timing shift of costs which will reverse during the remainder of 2019. The ten-cent upside the company gained in the first quarter will be largely offset by lower-than-expected EPS in the company’s second fiscal quarter, which are forecast at $0.56-$0.60 versus our $0.68 prior estimate. We plan to leave our second half outlook largely intact, calling for modestly positive as-reported yield performance in the third and fourth quarters, as new ships come online and capture solid pricing, while costs remain modestly negative ex-fuel. All in this should lead our updated EPS forecast to stand at the high end of management’s guidance.