Not long ago, I wrote an article explaining my bull thesis on Carnival Corp. (NYSE:CCL) and talked about why I believed many of the issues weighing on the stock's valuation were overblown. The problems were temporary, not that significant, and mattered little in the grand scheme of things.
In the latest quarter, CCL proved as much and reported better than expected results across key metrics. Sales and earnings both beat estimates and management raised guidance. Shares are up slightly after the beat, but we still think CCL is a compelling buy for long-term investors.
When I wrote my last article, the stock was down 13.5% YTD amid concerns about excess capacity in traditional cruise markets, weak pricing, Brexit, terrorism, a tepid global economy, a strong dollar, and even Zika.
The crux of my argument was that most of these factors were temporary, they wouldn't impact CCL's business as much as the market expected, and that the long-term growth story was still attractive thanks to secular travel tailwinds and opportunities for growth in both developed and emerging markets.
The results from the latest quarter suggest the fears are overblown. Occupancy (a measure of volume) and net revenue yield (a measure of pricing) both increased and the strength was broad-based. On a constant currency basis, net revenue yield increased 2.7%, and pricing was up nicely in North America, Europe, and Asia markets.
The reading from Europe was particularly encouraging, given that CCL's exposure to Europe (45% of capacity in the latest quarter) was one of the main concerns among investors. Cumulative advance bookings for the first half of next year are ahead of prior year levels and at "considerably higher prices" to boot. Management expects full year net revenue yields to increase 3.5%. Zika was a non-factor.
On the cost side, CCL continued to benefit from low fuel costs. Net costs excluding fuel increased 5.5%, but this largely reflects seasonal factors and it was a lower increase than what management expected back in June (6-7% growth).
CCL is the low-cost player thanks to industry-leading scale. This cost advantage is one of the pillars of our bull thesis, and when capacity expands like it did in the latest quarter, the benefits from fixed cost leverage help mitigate any seasonal pressures on unit costs.
For the full year, management expects net cruise costs to grow 1.5% on a constant currency basis, which implies margin expansion over last year when you compare it to the revenue forecast.
We think CCL is still a buy for investors with a long-term focus. Conditions have become more challenging for the cruise industry, but CCL's latest results prove that many of the fears are overblown. Despite the headwinds, CCL is on track to grow earnings 26% in 2016 to more than double the levels of just two years ago. It makes you wonder what CCL could do in a more favorable operating environment.
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.