Carnival: It's A Party, And You're Not Invited

| About: Carnival Corporation (CCL)
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I called for a buy on CCL under $45, but what do we do now?

I discuss recent performance.

The keys to focus on for 2017.

Ever feel like you missed the boat? How about feeling like there is a carnival and you weren't invited to the party? Okay, forgive my cheesy analogies. Recall that I called for a buy on shares of Carnival Corporation (NYSE:CCL), which is by far the largest cruise company in the world, over one year ago. It has been a decent call with the stock up about 20% since the thesis was submitted. 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. More people are working than 5 years ago. Oil prices have retracted to decade lows. This point is key as 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 if you can get them under $50 and especially under $45, which the name has touched a few times this year.

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 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 6.2% to $3.94 billion, and beating analyst estimates by $40 million. Adjusted net income came in at $491 billion or $0.67 per share, rising by 34% from last year. This beat estimates by a strong $0.09.

I will say that I will continue to love the stock with oil prices remaining rather 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 4.1%, which trounced the high end of the company's guidance of a 3.0% increase. Gross cruise costs including fuel increased just 0.2%. While net cruise costs did rise 1%, that was in line with expectations. Overall, this is a solid performance. This is a stellar set of results to be honest. Just one last point on the fuel prices; the changes in fuel prices hit earnings for $0.04. So they are an important contributor, but not the absolute key driver of earnings.

I have been bullish not just due to fuel prices, but because we have a somewhat stronger economy with more people back to work. Fuel prices actually rose a touch year over year to $267 per metric ton consumed (versus $253 last year). This is what led a bit of a hit to earnings. Now, this is still incredibly discounted. We are well below the $300-$400 per metric ton spent 18-24 months ago. This is clearly 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 when we can buy it on the cheap.

Looking ahead, these reduced fuel prices in conjunction with a stronger consumer will help pad the bottom line. Looking to 2017, cumulative advance bookings for the first three quarters of 2017 are well ahead of the prior year and have been sold at considerably higher prices. Since September, both booking volumes and prices for the first three quarters of 2017 have been running well ahead of the prior year, according to management. The company expects full year 2017 net revenue yields in constant currency to be up approximately 2.5% compared to the prior year. Further, 2017 net cruise costs excluding fuel in constant currency should be up approximately 1.0% compared to the prior year. I think this is conservative personally. However, fuel is likely to increase and could hit the company for $250 million more than in 2016. That said, adjusted earnings per share to be in the range of $3.30 to $3.60 for 2017. With the company repurchasing shares and a stronger economy, let this name pullback, and keep trading it.

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.