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Uncertainty reigns in the Caribbean but what will move the stock tomorrow?

Street already expecting lower guidance

  • Our recent pricing survey indicates continued volatility and discounting – FQ1 will be challenging
  • We expect management to provide guidance below the Street – flat yields – but that is already reflected in investor expectations
  • Indifferent on the stock heading into earnings but any price weakness could be buying opportunity since we believe conservative guidance will ultimately be achieved and potentially exceeded

As we highlighted in our cruise pricing survey conference call* yesterday, Caribbean pricing, particularly for CCL remains volatile.  Given the observed pricing volatility and pre-Wave uncertainty, we believe Carnival may issue conservative FY2014 guidance as part of its FQ4 earnings release tomorrow.  We’re expecting net yield guidance of -1% to +1%, which would suggest a midpoint of around $1.45 EPS, below consensus of $1.57. 

With the stock up 14% since our last positive price pivot signal from our survey in mid-October, one could surmise that the Street is optimistic about 2014 earnings.  We don’t think so.  Our conversations with investors indicate that they are already expecting lower guidance.  Certainly investors know that F1Q will be very challenging and the real juice is in Wave season, which hasn’t begun.  The newly minted CEO, Arnold Donald, will want to keep guidance beatable and since buy side expectations are already low, why not take advantage?

So what about the stock?  For the stock to move down significantly, we believe 2014 yield guidance would have to be negative, in our view.  On the positive side, the stock could pop on management endorsement of existing consensus or guidance only slightly below.  We’re indifferent on the stock into earnings but maintain that it could be a buying opportunity if investors react negatively.  The reasoning is simple.  We believe management’s guidance will be achieved and likely beat.

What kind of operating commentary will management provide?  They should emphasize that there is currently a seasonal lull before Wave season.  We think they will reiterate the long road to recovery for the embattled Carnival brand and are seeing improving signs albeit gradually.  The Caribbean continues to be fiercely competitive, particularly in the mass segment, with additional supply entering the market e.g. Norwegian Getaway (Feb 2014) and Quantum of the Seas (Dec 2014).  In addition, they should be cautiously optimistic on Europe.  Though this winter will be tough due to inclement weather, Europe is looking brighter for the summer itineraries.  Finally, we expect management to sway positively on Alaska. 

Here are our current projections for FQ1 and FY 2014:

THOUGHTS AHEAD OF CCL F4Q - ccc

*Note:  We hosted a conference call yesterday highlighting the results of our proprietary cruise pricing survey.  Please contact your sales contact if you’d like to hear the replay.