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Here's Why Investors Should Steer Clear of Carnival (CCL)

Zacks Equity Research

Carnival Corporation CCL has been losing sheen of late. A look at the company’s price trend reveals that the stock has had an unimpressive run on the bourses in the past three months. Notably, Carnival has lost 10.3% compared with the industry’s 3.5% decline. The recent decline can be primarily attributed to soft fiscal 2019 view. Let’s delve deeper.

Bleak Fiscal 2019 View

Despite reporting better-than-expected earnings in second-quarter fiscal 2019, the stock took a hit after the company trimmed its fiscal 2019 guidance. Carnival now expects net cruise revenues to improve 4.5%, with 4.5% capacity growth compared with the prior projections of increase by 5.5-4.6%, respectively. For the fiscal year, the company anticipates EPS to be in the $4.25-$4.35 band, down from $4.35-$4.55 projected earlier. Carnival expects third-quarter fiscal 2019 EPS to be $2.50-$2.54 compared with adjusted earnings of $2.36 per share reported the prior-year quarter.

Also, both third-quarter and fiscal 2019 estimates were pegged below the Zacks Consensus Estimate. Earnings estimates for the current quarter and year have too declined 5.2% and 4.2%, respectively, over the past 7 days, reflecting analysts’ concern surrounding the company’s earnings potential.



Policy Change on Travel to Cuba

Trump administration's policy change on travel to Cuba is concerning. Travel ban to Cuba will have a huge impact on cruise industry at the beginning of summer vacation season as demand for sailings in the region is very high. It will impact Carnival’s earnings by 4-6 cents in fiscal 2019. Moreover, Voyage disruptions related to Carnival Vista will hurt the bottom line by 8-10 cents.

This apart, the company is expecting lower ticket prices in the second half of 2019. Policy change on travel to Cuba will also impact other cruise operators like Norwegian Cruise Line Holdings Ltd. NCLH and Royal Caribbean Cruises Ltd. RCL.

Rising Costs

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 might weigh on the near-term margins and earnings.

Also, increased investments in advertising and TV programming are adding to the company’s costs. During the third quarter of fiscal 2019, net cruise costs (excluding fuel), per ALBD, are expected to increase by 0.5-1.5% compared with the prior-year figure, in constant currency. During fiscal 2019, the company expects full-year net cruise costs (excluding fuel) per ALBD to be up approximately 0.7% compared with prior guidance of 0.5% increase.

Zacks Rank & Stock to Consider

Carnival has a Zacks Rank #5 (Strong Sell).

A better-ranked stock in the same space is SeaWorld Entertainment, Inc. SEAS, carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SeaWorld Entertainment reported better-than-expected earnings in the trailing four quarters, the average being 35.6%.

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Carnival Corporation (CCL) : Free Stock Analysis Report
 
SeaWorld Entertainment, Inc. (SEAS) : Free Stock Analysis Report
 
Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
 
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