Chris Quigley, value investing expert and contributing editor to The Prudent Speculator, sees long-term potential in two leading cruise lines — Carnival Corp. (CCL) and Royal Caribbean Cruises (RCL). Here's his assessment.
Shares of Carnival Corp. (CCL) sank over 5% last week, even as the cruise line operator reported quarterly results that came in above estimates on both the top- and bottom-line.
For fiscal Q3, Carnival posted adjusted EPS of $2.36, which topped consensus expectations of $2.32.
Revenue for the period of $5.84 billion came in slightly above forecasts calling for $5.81 billion.
Based on the Q3 results and booking strength for the Q4, Carnival now expects full year 2018 net revenue yields, in constant currency, to be up 3.5% compared to the prior year, better than June guidance of up approximately 3.0%.
All seemed pretty solid to us, but short-term focused market players were concerned that CCL could run into future pressures due to currency and fuel costs, and a limited ability to further raise pricing.
While near-term headwinds will continue to blow, we maintain our long-term optimism on CCL and the overall cruise industry space, given favorable demographic trends and the fact that there are still meaningful growth opportunities in emerging economies, which are encouraging for global revenue diversification and the ability to rapidly reach a new customer base.
CCL shares now sport a 3.1% dividend yield and trade for 14.1 times estimated earnings. Our target price for the stock has sailed higher to $83.
Shares of Royal Caribbean Cruises (RCL) continued to fall last week with the overall market selloff, after the company reported Q3 results that we saw as an overall positive, but that included revenue that came in slightly below expectations.
The cruise line operator announced that it earned $3.98 per share in Q3, versus consensus analyst estimates of $3.97. RCL generated revenue of $2.80 billion, which was light of expectations of $2.82 billion.
Of course, revenue was up nearly 11%, with good continued trends in key performance indicators such as passenger count, available passenger cruise days and occupancy.
That said, operating margins were essentially flat, as the company noted persisting cost pressures because of higher fuel pricing and foreign currency headwinds
Management said it was narrowing its full-year adjusted EPS guidance from $8.70 to $8.90 to a range of $8.75 to $8.85, which includes a $0.10 negative impact from currency and fuel since its prior update in the summer.
The company said it is experiencing strong early booking trends for 2019. Booked load factors and rates are higher than the same time last year across all core products while the booking window has continued to extend.
The market response to Symphony of the Seas, Azamara Pursuit and Celebrity Edge has been excellent. While these ships are being introduced this year, 2019 will see the benefit of their full year of operations in various markets as they sail in both North America and Europe.
While RCL and its competitors will have to continue to deal with elevated fuel prices, we think the headwind is reasonably under control as the company currently has a bit more than 50% of its fuel costs hedged.
We continue to be optimistic on the overall prospects of the cruise industry, especially given favorable demographic and cruise-pricing trends, and the long-term potential in emerging markets.
Shares trade for an attractive 10.7 times projected next-12-month earnings with a dividend yield of 2.7%. Our target price for RCL is now $150.
