Tuesday, 22 September 2015

Carnival: rough waters or back to smooth sailing soon?

I have been waiting for some time for a bit of weakness in the Carnival share price. As I detailed here a few months ago I like many of the themes and trends around the stock...it was just a question of paying a fair price all considered.

Following today's Q3 numbers publication the shares are down around 5% to US$50.  Whilst it is a rough day on the market why did the stock fall so heavily?

Essentially there were a good amount of solid operational positives including...

  • 3Q net revenue yields in constant dollars increased 4.3% compared to the prior year, better than June guidance of up 2 to 3%;
  • 3Q net cruise costs excluding fuel per available lower berth day (“ALBD”) in constant dollars increased 1.0% compared to the prior year, better than June guidance of up 2 to 3% due to the timing of certain expenses;
  • 3Q non-GAAP earnings per share (diluted) of $1.75, compared to $1.58 for the prior year

...and the outlook statement was hardly shabby either with positive comments on advance bookings,revenue yields and FY15 non-GAAP EPS to be a little ahead of hopes:

 But it was the last bullet point above which also captured attention as the Q4 earnings hopes were...below hopes.  How could this be so?  On the conference call management noted a variety of factors including a ship delivery delay and in Europe disruptions from both the relatively troubled local economies and the migrant crisis.

But other forward hopes into next year read better including anticipated operating cash generation, continued emphasis on making the dividend progressive and general positive trends into 2016:

So is the share back at a fair value now?  The bulls would hold out hopes for US$3bn worth of operating profitability and therefore put this on around x16 EV/ebit which for a thematically positive company could perhaps be justifiable.  I think profitability is ultimately going there...but not immediately and hence why I still prefer more the mid US$40s level.  Meanwhile I do note that the free cash flow generation is now running around the 4% level telling you that the double up level is about US$40/share (or around a 5% yield).

So whilst the share price today suggests rough water actually the real tone of the company is all about the smooth water ahead.  Buy on any weakness to the level suggested above. 

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