CCL: 2014 LISTING TO THE DOWNSIDE

FY2013 should be ok but what about 2014?

Our pricing survey indicates some Caribbean weakness for the Carnival brand particularly FQ1 2014.  CCL reports FQ3 earnings next Tuesday morning.  We expect CCL to report at the upper end of its net yield guidance (-3.5% to -4.5%) and tighten its FY 2013 yield guidance (-2% to -3%).  While Carnival brand pricing in the Caribbean remains stubbornly low, we believe management had already taken the significant discounting into account for FY 2013.  However, the Street may be underestimating the potential for significant weakness in Carnival brand pricing for FQ1 2014.   In fact, we are projecting FQ1 EPS and yields of $0.05 and 0.6%, respectively, well below the Street at $0.16 and 2.0%.

Management may point to better pricing growth in the summer but we think it’s too early as wave season is not for a few months.  For the full year of fiscal 2014, we’re projecting $2.09 versus the Street at $2.22.  Wave season risk is high next year, as are fuel prices.

Bunker fuel mix prices (80% IFO 380, 3% IFO 180, 17% MGO) have gained 4% since Carnival issued guidance.  We estimate higher fuel prices and adverse FX has cut 2H 2013 EPS by 4 cents.

At an expensive forward valuation at 18x 2014 EPS - 1.4x above its 5-year average – Carnival is trading at a level that suggests a full pricing recovery in FY2015.  The coast is definitely not clear yet, particularly in the Caribbean.