It takes a whole lot of hard work and determination to succeed in any industry – but right now, cruise ship operators are making it look pretty easy.
Big players like Royal Caribbean (RCL, Financial) and Norwegian Cruise Line (NCLH, Financial) have been raking in numbers like you wouldn’t believe, and share prices have skyrocketed accordingly. But nobody in the business is packing them in quite like Carnival (CCL, Financial).
Despite taking a few knocks and a lot of bad press over the last five years, Carnival’s financials seem untouchable. The world’s largest cruise ship operator has blown Wall Street’s profit targets out of the water for the last four consecutive quarters – and this week has proven no different.
On Wednesday, Carnival CEO Arnold Donald unveiled a jaw-dropping start to fiscal year 2016, with profits nearly tripling at $142 million. The company brought in a net income of $301 million, equating to 39 cents diluted earnings per share. Stack that against last year’s $159 million, and it’s safe to say business is already booming in 2016.
Bearing that in mind, Carnival has already upped its growth forecast for the full year and is anticipating its adjusted EPS will hit up to $3.40. How on earth is Carnival doing it?
First and foremost, Carnival has a lot of exciting new developments going on. It has a brand in Germany pushing incredible numbers, is on the cusp of launching a new voluntourism line and stands to rake in a lot of money after getting the green light to start operating ships between the U.S. and Havana.
Yet by and large, the single greatest factor in Carnival’s recent success has been rock-bottom oil prices. That alone should give value investors reason to tread carefully here.
At the end of last year, the company was paying just $316 per metric ton for fuel – down 46% year over year. Fast forward to fiscal year 2016, and Carnival is still paying peanuts to power its fleet. Fuel expenses in the first quarter came in at just $187 million versus $318 million a year ago. Although that’s a pretty big savings, it’s worth pointing out there's been a small climb over the previous quarter.
Analysts reckon it will take some time, but fuel prices will undeniably surge again in the next 12 months. Carnival’s operating expenses will rise accordingly. Whether that impacts the company’s bottom line this time next year will depend entirely upon how Donald and his team are hedging their bets in the here and now.
In the last six months, Carnival has been trying to reinvest the money it's currently saving on a few potentially lucrative projects. The most likely to generate big returns will be its new “social impact travel” brand. Dubbed "fathom," the line will attempt to solidify Carnival’s presence in a ridiculously underserved voluntourism market that's worth an estimated $2.8 billion in untapped revenue.
So long as Carnival can execute, there’s no reason fathom won't succeed. Yet whether those returns will match the fuel savings Carnival must soon kiss goodbye is another matter entirely.
Apart from that, the only real cause for concern over the next 12 months will be the safeguards Carnival has in place to protect against unfavorable exchange rates. Shifting currencies dragged the company’s gross revenue yields down 0.4% in the first quarter of 2016. That’s actually not too bad – but fluctuating stability in crucial European markets could hit Carnival a bit harder toward the end of the year.
Where does that leave investors? It depends on what you're after.
Carnival's numbers are strong. The company has just posted five consecutive quarters of incredible growth, and it’s poised for an even better 2016. Bearing that in mind, Carnival looks like a pretty safe buy that will provide great value for money in the short term. Yet there are definitely a couple of tiny cracks in the windshield that merit a second guess. Rising fuel prices and currency woes may start to dent Carnival in the years to come – and so long-term investors would do well to keep an eye on the horizon.
