CCL 3Q PREVIEW

Bad news expected

Weaker pricing but strong bookings (though not as strong as 3 months ago) may be the theme of CCL’s 3Q conference call next Tuesday.  But investors are already expecting soft business commentary.  While guidance may be lowered slightly, business is not that bad and we don’t expect the earnings release to be a big negative. But we are also not overly bullish on CCL for a couple of reasons: 1) Q4 North America pricing concerns; 2) valuation not cheap enough.

While we expect in-line results for 3Q due to good expense control, we are a little concerned about their 4Q guidance, particularly pertaining to North America.  According to our pricing database, Carnival’s Q4 pricing power in the Caribbean has been lackluster particularly for ships such as Glory, Liberty, and Miracle.  In addition, we are not seeing much positive pricing momentum for the rest of the North America itineraries.  As a result, CCL may lower the outlook for North America, which wouldn’t be surprising given the US macro environment. 

We are less concerned about the European outlook.  The company will address the many cancellations stemming from the unrest in that region.  However, we’re seeing pricing stability in some of the European itineraries which had taken a severe beating.

The stock is not super cheap as it is only down 11% since July 21 (Q2 earnings release); comparatively, RCL is 33% lower. CCL is currently trading at 11x forward earnings, above its trough March 2009 valuation of 8x.  Moreover, despite all the downgrades and negative sentiment from the sell-side, only 4% has been shaved from consensus FY2012 EPS since Q2 earnings.

Nevertheless, expectations are low going into the call. So unless guidance is a complete bomb, much of the bad news has already been reflected in the stock.

Q3 Detail:

Q3 2011: $1.63 EPS vs. consensus of $1.64 (guidance $1.60-1.64)

All numbers in Constant Currency unless otherwise noted.

Yields:

• Net Yield per ALBD: 1.5% (5.8% in current dollars)
  • Fleetwide ticket yield of 1.6%
    • North America brand ticket yield: 3.9%
    • EAA brand ticket yield: -1.4%
• On board yield: 1.5%

Revenues: $5.0BN, 2% higher than consensus

Costs:

• Net Cruise costs per ALBD ex Fuel: 7.1% (in Current dollars)—lower end of guidance
• Fuel: $682/metric ton; 848k metric tons consumed