Carnival's Foul Forecast Isn't Clearing Up

By Laura Forman 

Carnival Corporation may be exciting travelers at sea, but its investors aren't having much fun.

On Thursday, Carnival surprised Wall Street with an unscheduled earnings report for its fiscal second quarter ended May 31. Results were mixed with adjusted earnings per share besting management's guidance, but still falling year over year. Guidance was less thrilling. Carnival lowered its full year earnings forecast it gave in March from $4.35 to $4.55 to a lower, tighter range of $4.25 to $4.35 - a forewarning of choppy waters ahead.

In a conference call for investors, Carnival cited several factors it expected to weigh on earnings this year, including new restrictions imposed by the Trump administration on travel to Cuba, which took effect earlier this month. Carnival said the change, which meant diverting Havana-bound passengers to alternate destination ports on little notice, was "disruptive," and that it must now select "lower-yield" destinations.

Driving Carnival's unexpected report Thursday was news that the company would be canceling three coming voyages for the Carnival Vista because of issues affecting the vessel's maximum cruising speed. Carnival said it would need to remove the relatively new ship from service for 17 days in July. It has a passenger capacity of nearly 4,000, according to Carnival's website. The cruise line says it operates 104 ships with 243,000 total lower berths around the world.

Brand Ambassador and senior cruise director for Carnival John Heald posted the Vista news Thursday on Facebook, apologizing to customers affected and outlining compensation, which includes a full refund and a full credit for a new cruise booking, among other things. The post got more than 1,400 comments in a number of hours, most of them praising Carnival's customer service. If only smiles were free: the company said it expects voyage disruptions to Carnival Vista to negatively impact full-year earnings per share by as much as $0.10.

Perhaps the strongest wave came in the news of slowing demand from travelers in continental Europe. The company said soft demand in the region would result in lower revenue yields in the second half of the year. A regional slowdown could disproportionately affect Carnival relative to competitors. According to UBS leisure analyst Robin Farley, roughly 20% of Carnival's customers come from this area compared with about 5-7% for Royal Caribean Cruises, Ltd. Further, Ms. Farley said some of Carnival's brands source heavily from their home countries, including Germany's AIDA Cruises and Italy's Costa Cruises, while lines operated by competitors have more optionality.

Carnival's stock tanked in response to the bad news, closing down around 8% Thursday and by another 4% by Friday afternoon. Carnival's stock is now down more than 5% year-to-date. And while other major cruise stocks declined in sympathy, Royal Caribean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. were up 18% and 21% this year through midday trading Friday, respectively.

While Carnival is known to guide conservatively and its stock is trading near its 12-month lows based on forward price to earnings, investors would be wise to keep their hatches battened down until it becomes clear when European demand will rebound.

Write to Laura Forman at [e-mail]

(END) Dow Jones Newswires

June 21, 2019 16:44 ET (20:44 GMT)

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