Friday, 18 December 2015

Impressive numbers from Carnival

The Carnival numbers were strong enough for the cruise ship operator to proudly claim on its conference call that 'we were able to beat the higher end of our full year guidance'.  I last looked at the company three months ago (link here) and noted back then that:

'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'

Well the company really delivered with a combination of better revenue yields and lower fuel costs.

As noted above however it is all about the future - or, at least, where the company is going.  Before we get to the EPS forecast for FY16 let's have a look at some of the building blocks.  

First I liked the observation that: 

'At this time, cumulative advance bookings for the first three quarters of 2016 are well ahead of the prior year at slightly higher constant currency prices'

That sounds like pricing power to me (and they also noted that they are 'really well protected' on oil prices up to c. US$80/boe).  On the conference call the company talked about a 3.5% capacity increase with the majority of this increase actually coming in the Asian market (as a new boat launched capacity will go up 60% year-on-year) where they still see structural growth opportunities (but did reiterate that currently it is only c. 5% of their business).  They also noted that their macro view on European improving a little was factored into forward guidance.

So perhaps no surprise then that the expected EPS growth is estimated at (mid-point of guidance) 20%:

'FY 2016 adjusted earnings per share (diluted) are expected to be in the range of $3.10 to $3.40, compared to $2.70 per share in FY2015'

Even better potentially for shareholders was the observation that they are going to be more aggressive in returning cash to shareholders with the observation that: 

'we expect to continue to return excess cash to shareholders as demonstrated by our recent 20 percent increase in quarterly dividends and more than $400 million in share repurchases'

I observed at the link above that the company was generating around about a 5% free cash flow yield and given the current c. 2.3% yield and with ND:ebitda ratios falling below x2 times flexibility clearly remains.  Funnily enough looking at that mooted US$3bn of operating profitability, the mid-point of guidance gets to around this number.  

So that makes today's forward EV/ebit multiple on the shares in the x15s EV/ebit.  Combined with the aforementioned c. 5% free cash flow yield that is no disaster.  Around a x14 EV/ebit multiple would suggest value to me and this is consistent with around a US$47.50 share price.  I think that is the price to buy with a double up / augmentation c. 10% below at around US$42.50. 

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