CCL put up a terrific quarter, all things considered, and issued lower guidance, but better than we thought. Some of the cost savings generated in the quarter look like they are sustainable. The cost savings, combined with Fx benefits are causing us to raise our 2010 estimate to $1.60.
However, our $1.60 is well below the Street at $2.07. While most analysts project flat yields in 2010, we believe demand will not increase even close to the 9% necessary to offset the industry capacity increase. Management hinted at this with their limited discussion of Q1 bookings.
"We do expect to have yield declines in the first quarter of 2010. This results from year-over-year comparisons being very difficult since a good percentage of 2009 first quarter business was booked before the economy began entering into the recession in the third and fourth quarter's of last year."
Here are our takeaways:
Q2:
- Came in line with our revenues , but beat on the costs (that's where we thought they could probably be better than expected)
- Beats came in two categories - commissions/ cost of distribution and rebates (cost of passenger tickets) and "other shipping costs" which we increased after the company guided to the swine flu impact. D&A was 7MM lower than our estimate and there was also 5MM of "other income" which we didn't include in our forecast
- The $1.7BN of debt that CCL raised this quarter puts their balance sheet in good shape, as they will be able to finance their entire pipeline and still have plenty of availability on their Revolving Credit Facility
Outlook:
- Net yield guidance for 2009 is unchanged, simply adjusted for the weaker dollar, which benefits revenues and hurt on the cost side (relative to guidance last quarter)
- As expected, net cruise costs will decline less than previously forecasted given the run up in fuel costs and weaker dollar. However, excluding fuel, cost cuts were better than previously guided too (again no surprise here)
- Fuel impact as we expected, and we think that CCL left themselves a little cushion for further increases as well. Their 3Q09 guidance for fuel costs is about $15 higher per metric ton than our assumption.
- CCL gave some preliminary commentary on 1Q2010. The good news is that, as of the last few weeks at least, booking volumes are on pace with what they were one year ago for the comparable period on a supply adjusted basis. The bad news is that early indications point to negative yields for 1Q2010. The reality is that CCL won't know where pricing is shaking out for at least one more quarter. Our guess is that it will still be down unless demand miraculously comes in 9% higher. The math is simple; any shortfall is made up with price reductions.
The stock had a nice day yesterday, and rightly so. Today we've had a couple of upgrades which have pushed the valuation to 17x our 2010 number. CCL is not overly expensive but the valuation a little worrisome for a company facing uncertain demand, big capacity increases, and declining ROIC.
