Argus Research

03/09/2017 7:00 am EST

Focus: STRATEGIES

Carnival Corp. (CCL) is the dominant cruise company in an industry characterized by few direct competitors, high barriers to entry, and favorable demographics.

CCL reported fiscal 4Q16 EPS of $0.67, up from $0.50 in the prior-year period. EPS topped the consensus estimate of $0.58 and management’s guidance of $0.55-$0.59. 

The positive earnings surprise reflected strong demand for cruises booked near their departure date (close-in bookings). Revenue increased 6% to $3.94 billion, and topped the consensus estimate of $3.92 billion. 

Given the company’s strong free cash flow, we expect management to continue to raise the dividend and accelerate stock buybacks. Over the long term, we remain bullish on Carnival, based on its leading position in the industry and our expectations for increased demand for cruises among affluent baby boomers. 

We had maintained a HOLD rating on CCL in the wake of several cruise mishaps that occurred in 2012-2014.  However, we now expect margins and earnings to benefit from a continued recovery in cruise demand, and believe that a BUY rating is appropriate. We are setting a target price of $64. 

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