It’s time for Carnival (CCL 3.60%) (DICK 3.60%) to make her quarterly port on the not-so-private island of financial reality. The world’s largest cruise line operator will announce results for the fiscal third quarter ended in August on Friday morning. Investors hope it’s the cure to end the industry’s recent period of seasickness.
The market is bracing for big improvements year over year, and that’s not a surprise since only a limited number of ships across Carnival’s multiple fleets were on the high seas last summer. One analyst also raised his price target on Carnival’s depressed stock, and it’s usually an encouraging sign when Wall Street adjusts its outlook for the better ahead of a trading update.
Which way will Carnival sail after the fresh numbers come out? Let’s take a closer look to see why it’s okay to be cautiously optimistic about the bellwether cruise industry this week.
Image source: Getty Images.
Crashing waves
It has not been easy for carnival investors. The stock has fallen 56% this year, hitting its lowest close in nearly two months on Monday. You’d expect a stock that loses more than half its value in a year to flounder, but Carnival is navigating these tricky waters well. Analysts see revenue rising sevenfold to $500 million, a figure that has risen recently.
Wall Street is facing a much smaller quarterly deficit than last year’s red ink, and things could be even better. Some of the most bullish analysts are seeing a profit for the three months ending in August. It would certainly be comforting for Carnival to post positive net income after 10 consecutive quarters of losses, but the trend is not kind when it comes to recent updates.
| EPS (estimate) | EPS (current) | Surprise | |
|---|---|---|---|
| Q3 2021 | ($1.25) | ($1.55) | (24%) |
| Q4 2021 | ($1.27) | ($1.52) | (20%) |
| Q1 2022 | ($1.00) | ($1.57) | (57%) |
| Q2 2022 | ($1.14) | ($1.63) | (43%) |
Source: Yahoo! Finance.
Investors have seen nothing but bigger-than-expected losses over the past year. This isn’t the kind of moment long-time stockholders like to see, but business has clearly improved for the industry during the critical summer season. Many people have returned to sailing. The real question is whether passenger growth can eventually turn the corner.
Most input costs are higher than a year ago, but there has been continued easing in energy and some food costs. Even the most pessimistic analysts are targeting a loss of just $0.60 per share, significantly better than deficits of at least $1.50 per share in each of the recent reports. For Carnival to not only beat the Wall Street consensus of $0.13 per share, but to deliver an actual profit would be a great moment for the cruise line. It is also likely to increase the shares of its competitors that have fiscal quarters that end a month later.
Financial Truist analyst Patrick Scholes raised his price target on the stock from $8 to $10 last week. He still has a sell rating on the stock, but his channel checks are showing the winds of optimism. Announcements last month to ease vaccine and testing rules are boosting booking volumes. Later this week, Canada will be the latest country to lift most of its travel security protocols, making it easier for travelers to come and go.
Scholes still has his concerns – hence the sell rating. Cruise line operators took on a lot of new debt or issued new stock to overcome the operating lull. Leverage is problematic in this climate of high borrowing costs and capital offerings will dampen the recovery in earnings per share. Still, there’s no denying that a strong report from Carnival — and equally optimistic comments about future booking trends — could lift the entire industry higher in a matter of days. It’s time to see how decent the cruise line’s reservations were during the summer season.
