The last week was not smooth sailing for cruise line Carnival Corp (CCL), even as the company posted earnings of $0.66 per share in Q2 2019 (vs. $0.62 est.), explains value investor Jason Clark, contributing editor to The Prudent Speculator.
The company had revenue of $4.8 billion, versus the $4.5 billion estimate. Shares slid nearly 12% following the announcement, which came ahead of schedule, as the company’s gloomy full-year forecast troubled analysts.
Carnival CEO Arnold Donald commented, “We have the foundation and we remain steadfast in our commitment to consistently deliver double-digit earnings growth and growth in return on invested capital over time."
Looking ahead, Mr. Donald added, “We’re updating our adjusted earnings guidance range, previously $4.35 to $4.55, now $4.25 to $4.35.”
The cruise operator has been on the receiving end of a lot of flack lately, earlier in the month having agreed to pay $20 million for environmental-related violations. The judge in the case chided Mr. Donald and chairman Micky Arison for the company’s third conviction of this type of crime, reminding them that without the environment, CCL would have nothing to sell.
In addition, MSC Opera crashed heavily into its dock in Venice, prompting much blow back from locals, some of whom would like to see cruise ships docked elsewhere. Although CCL does not own the MSC Opera, it does sail to Venice and changes to docking there or elsewhere could have significant impact on the business.
Analysts had been expecting the company's earnings per share midpoint for 2019 to be around $4.55, but the actual guidance had a midpoint of $4.30.
A confluence of mostly unrelated events have put a damper on CCL’s ability to execute over the near term and it’s unclear when geopolitical headwinds will abate (particularly in relation to the inability to dock in Cuba), but we maintain our long-term optimism on CCL.
We also remains optimistic on the 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.
While near-term headwinds will continue to blow, Carnival Cruise shares now sport a 4.3% dividend yield and a forward P/E ratio of 10.2. Our target price has been trimmed to $75 per share.
