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Carnival Cruises Rough Economic Seas

Posted: Jun 23, 2008 08:11 AM by Glenn Curtis

Tickers in this Article: CCL, RCL

Carnival Cruise Lines (NYSE:CCL) is sailing in the middle of some pretty choppy economic waters right now. Fuel costs have skyrocketed and there is a concern that vacationers may scale back their holiday spending. Despite these issues, Carnival has performed quite well. As evidence I would turn to its recent second-quarter results.

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Quarterly Roundup
In the period ended May 31, the Miami-based cruise line generated $3.4 billion in revenue, which is north of the $2.9 billion it booked in the comparable period last year. The total jump was about 16.5%. And on the bottom line Carnival earned $390 million, or 49 cents a share. That's essentially flat with the $390 million, or 48 cents a share, it earned the comparable period last year.

Why the lackluster bottom-line you ask?

No big surprise, rising fuel costs played a big role. In the earnings release Carnival's chief executive, Mickey Arison said "higher fuel prices cost the company $158 million, or 19 cents per share, during the quarter."

With the housekeeping out of the way, let's examine what makes Carnival an interesting investment right now.

Revenue Growth Keeps Pace with Costs
In the second quarter, fuel costs rose a whopping 67.3% over the comparable period last year to $425 million from $254 million. But, to its credit, management appears to have kept other key costs under control.

For example, its food costs increased to $210 million from $181 million in last year's Q2 . That's a roughly 16% jump, but it's in line with the overall percentage revenue increase, and I would suggest impressive as well from the standpoint that food prices have generally gone up from a year ago.

The "payroll and related" line also shows off management's ability to keep pace. In the comparable period last year it came in at $321 million and in the most recent quarter it was $365, a 13.7% increase. That's under the rate of the revenue growth booked in the quarter.

It's good to see management, literally, running a tight ship during these trying times. It will help Carnival score some points with the analyst community and help existing retail and institutional shareholders to remain patient. The second reason its cost controls are worth noting is that, if and when, fuel prices come back down, Carnival should have a fair amount of leverage and its earnings could really take off. (For tips that will save you money, read Getting A Grip On The Cost Of Gas.)

Bookings Remain Key
There was one other tidbit that stood out in the release: "Occupancy levels for advance bookings for the next twelve months are in line with the prior year, with ticket prices for these bookings at higher levels."

This is great news. It shows consumers haven't given up on their vacation plans just yet, despite all the doom and gloom we hear in the financial media. Cruises are an attractive vacation idea right now. The booking price usually includes your room, and lots of meals and entertainment. Dollar for dollar the value is hard to beat.

Downside Risks
There are no guarantees that consumers will contonue to spend money in the casinos or on those fancy umbrella drinks if the economy continues to worsen. Another point that must be made is that competition from arch-rival Royal Caribbean (NYSE:RCL), which visits many of the same port cities, remains stiff. (Learn about competition, and how it can affect businesses' profits, in our Economics Basics tutorial.)

Finally, another slight turn off is that management scaled back its full-year 2008 earnings forecast to $2.70-2.80 per share from $3-3.20 per share. In my book, that's not the end of the world because this means the company trades at a respectable 13.4-times the present forecast, but it is worth mentioning nonetheless. (Explore the controversies surrounding companies commenting on their forward looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Bottom Line
Carnival Cruise Line's first quarter was pretty solid given that it had to deal with a huge bump up in fuel costs. Going forward, while I still think there could be some choppy seas, I believe that this is a good long-term play.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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