Carnival: Sail Into Profits

| About: Carnival Corporation (CCL)

Summary

Shares are up 10% since I called for a buy last year but have taken a hit following BREXIT.

Continued strong bookings and expected moderation in oil prices will continue to support the company's margins.

Q2 earnings are out and I discuss the results in addition to the expectations for the future.

You may recollect that I called for a buy on shares of Carnival Corporation (NYSE:CCL), which is by far the largest cruise company in the world, a little over one year ago. It has been a decent call with the stock up about 10% since the thesis was submitted, of course, the percent gain depends on the day, with global stocks having been crushed following the so-called BREXIT event. But just because of one decision was made by a single country about its economic and political future, does that mean the whole world stops? Do people stop eating? Drinking? Vacationing? The answer is absolutely not. That takes me to the crux of the present column this morning. I got behind Carnival because I believed it was over the hump of recovering from all of the setbacks it had seen over the years. I liked that the fleet has slowly grown and a few more ships should be added over the next year. While the economy is less than stellar, it has slowly recovered and is the strongest, relatively speaking, that it has been in some time, thanks to some favorable macroeconomic conditions that benefit the consumer. As I have quipped in the past, we know that more people are working than 5 years ago. Oil prices have retracted to decade lows. This is one of the company's greatest expenses, but is also an immediate tax cut on the consumer. More money in the consumers' pocket means more opportunity for them to spend and boost the economy. I continue to like shares under $50, and now that they are under $45 I think the name is a steal.

Why do I say this? Well first I still believe this name can help you diversify your portfolio. That said, it is all about performance and expectations. Well turning to the company's just reported earnings, I see positive expectations for the future. As I felt the company might do, it reported a rather strong quarter, with revenues rising year-over-year by 3.3% to $3.71 billion, and beating analyst estimates by $30 million. However, a strong dollar continues to impact the revenues, though this has diminished a bit. If we look at things in a constant dollar basis, then revenues were up an extra 0.1%. Adjusted net income came in at $370 million or $0.49 per share. This crushed estimates by $0.10. This is up (and nearly double) from the $193 million or $0.20 per share in Q2 a year ago.

I will say that I will continue to love the stock with oil prices remaining low. Although revenues on the surface were up year-over-year it is important to note that on a constant dollar basis, net revenue yields actually rose another 3.6%, beating the company's guidance of a 1.5 to 2.5% increase. Further, net cruise costs actually DECLINED by 1.9%, which was incredibly strong versus the company's guidance of a rise of 0.5 to 1.5%. Wow. Gross cruise costs including fuel decreased 5.4% in constant dollars. This is a stellar set of results to be honest. Just one last point on the fuel prices; the changes in fuel prices increased earnings by $0.04. So they are an important contributor, but not the key driver of earnings.

Once again, the reason I am bullish is not just fuel prices but a somewhat strong economy with more people back to work. Fuel prices dropped 17% year-over-year to $280 per metric ton consumed. This is what led a bit of a bump in earnings. The drop from $339 per metric ton consumed last year is helping to drive the company's ability to make money, in addition to rising sales on cruises of food, alcohol and merchandise. Fuel costs pleasantly surprised and were far below guidance. The reduced fuel costs combined with new initiatives to fill cruise ships with customers and up on board sales is why I want to own this stock moving forward.

Looking ahead, these reduced fuel prices in conjunction with a stronger consumer will help pad the bottom line. Full year 2016 constant currency net revenue yields are expected to be up 3.5% compared to 2015. Net cruise costs excluding fuel for the second quarter are expected to be 1.5% higher on a constant dollar basis compared to the prior year. Based on the above factors, the company expects adjusted earnings for 2016 to be in the range of $3.25 to $3.35 per share, compared to 2015 adjusted earnings of $2.70 per share. For shareholders, the dividend was recently hiked 20% to $0.30 per quarter, up from the $0.25 dividend that was paid out before. Further, the company just announced an additional $1 billion share repurchase authorization. All things considered, you are getting paid a solid dividend with the likelihood for growth and as such I still like Carnival.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.