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Miami-based Carnival Corporation (CCL), the world’s biggest cruise line operator, is slated to release its second quarter 2011 earnings results on June 21, before the opening bell. Carnival expects second quarter 2011 earnings in the range of 20 cents to 24 cents per share. The Zacks Consensus Estimate for the second quarter is pegged at 22 cents (reflecting a fall of 30.8% year over year) and is within the guidance range.

Carnival has outperformed the Zacks Consensus Estimate in three out of the last four quarters. Earnings surprise ranges from negative 3.12% to positive 12.3%, with the average being 5.3%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter Recap

Carnival’s first quarter 2011 earnings of 19 cents per share were in line with the Zacks Consensus Estimate but failed to beat the year-ago quarter earnings of 22 cents.

The improvement in results was aided by better-than-expected net revenue yields and the ongoing cost-reduction initiatives, which more than offset the hike in fuel prices.

Total revenue spiked 7.6% from the prior-year quarter to $3.4 billion and was ahead of the Zacks Consensus Estimate of $3.3 billion. On a constant currency basis, net revenue yields rose 2.0% from the prior-year quarter and were in line with management’s guidance. Gross revenue yields rose 2.4% at current dollars.

Net cruise costs, excluding fuel and gain in the prior-year quarter from the sale of P&O Cruises, were flat year over year on a constant dollar basis. Fuel price of $543 per metric ton was up 9.0% year over year, a substantial increase from management’s guidance of $526 per metric ton.

Estimates Revisions Trend

Estimates have moved down in the last 30 and 7 days, respectively, implying that the analysts depict a negative outlook for the upcoming quarter.

Agreement of Analysts

Revision trends in the last 30 days have drifted toward the negative side. For the second quarter, out of the 13 analysts covering the stock, two have lowered their estimates while one moved in the opposite direction. For both fiscal 2011 and 2012, estimates were slashed by 8 and 6 analysts, respectively, while none of the analysts raised their estimates.

In the last 7 days, one analyst lifted his estimate and one trimmed the same for the upcoming quarter, thus providing no clear direction. For both fiscal 2011 and 2012, 8 and 6 analysts, respectively, have decreased their estimates while none increased their estimates.

Negative revisions by the analysts are based on management’s reduced fiscal 2011 earnings outlook ($2.35–$2.45 from $2.55–$2.55) based on route changes of almost 300 itineraries since February and March arising from the political turmoil in the Middle East and North Africa and lingering effects of the earthquake in Japan as well as higher fuel prices.

The guidance has been lowered by 15 cents due to direction changes in the Middle East and North Africa and 5 cents due to rising fuel prices. Since the company provided its guidance for 2011 in December, the same has reduced to a range of 55 cents to 65 cents.

However, one analyst has raised the estimate as the company is experiencing strong demand in the North American market and anticipates sequential improvement in the second half of 2011.

Magnitude of Estimate Revisions

Over the past 30 days, Carnival’s estimates have dropped by a penny for the second quarter, by 8 cents for fiscal 2011 and by 9 cents for fiscal 2012. In the last 7 days, Carnival’s estimates remained in line for the second quarter and 2011, but have been trimmed by 9 cents for 2012. Currently, the Zacks Consensus Estimates for the second quarter, fiscal 2011 and 2012 are pegged at 22 cents, $2.51 and $3.04, respectively.

Our Take

We expect Carnival’s second quarter results to be depressed due to near-term challenges. The company is also expected to report below the Zacks Consensus Estimate.

However, a strong balance sheet and solid cash generation should position Carnival well and promise above-average long-term growth in an improving economy, marked with slower industry capacity growth and reviving consumer demand.

Carnival is also approaching the third quarter of operation, which is seasonally stronger due to the summer months in the Northern Hemisphere. The Alaska cruise season extends from May through September resulting in higher net revenue yields.

Moreover, the company is experiencing a recovery in pricing, as consumer demand is once again outpacing supply growth. Presently, the pricing environment in North America is better than last year. Although Caribbean pricing was lower in the second quarter of 2011, pricing for the third quarter is higher than the year-ago level due to fewer capacity additions. Caribbean pricing is expected to be strong by the fourth quarter of 2011.

On the flip side, surging fuel prices are acting as a major hindrance to the company’s growth. Moreover, greater exposure to the sluggish European market, overall inflationary outlook and political disturbances in some geographical regions will remain headwinds for the company. Hence, the company has a Zacks #4 Rank (short-term Sell rating). We also reiterate our long-term Neutral recommendation.

Carnival’s strongest competitor Royal Caribbean Cruises Ltd. (RCL) will release its second quarter 2011 earnings on July 28, 2011.

Source: Carnival Corporation: Earnings Preview