Archive for December, 2010

Carnival delivers early Christmas present

Following yesterday's upgrade to Overweight and a $51 price target, Carnival (CCL) released 4th quarter and year end earnings this morning delivering investors an early Christmas present.

Earnings were in line with analyst expectations, overcoming some of the expected costs associated with the Splendor engine fire.   Carnival posted net income of $248 million, or 31 cents a share.  Carnival also guided full year 2011 earnings in range of $2.90 to $3.10 a share versus analyst's average estimate of $2.92.  The generally upbeat expectations mirrored the sentiment of travel agents in the recently completed fourth quarter Cruise Pulse Survey.  Agents reported average ticket pricing 14% higher ($1,639) than in the previous quarter ($1,406). Compared to the same quarter the year prior ($1,582), ticket pricing was 3.5% higher.  Agents stated cruises booked so far 2011 were averaging $1,718, a 4.8% increase over current quarter pricing.  Increased pricing power is not the only good news for the cruise industry.  Additional capacity coming online in 2011 will help drive more passengers aboard cruise ships of all brands.  Annualized total passengers carried world wide will be 19.2 million in 2011, a 4.1% increase over 2010.

The market responded with its own form of holiday cheer by driving Carnival's price per share (pps) up 4.5% to a new 52 week high.  Not to be outdone, Royal Caribbean (RCL) itself rode the wave of news higher, with its stock price increasing nearly 8%.


Cruise Market Watch Announces 2011 Cruise Line Market Share and Revenue Projections

Among the 2011 highlights:

On the heals of the 3,650 passenger Carnival Dream, the 5,400 passenger Royal Caribbean Oasis and Allure and the 4,200-guest Norwegian Epic a total of 14 additional cruise ships will come online by 2014. These new ships will add another $1.6 billion in annual revenue to the cruise industry. By 2014, 21.6 million cruise passengers are expected to be carried worldwide.

The new ships bring attention to cruising, creating interest, additional pricing power, economies of scale and bookings of first time cruisers.  Average cruise revenue per passenger (APCD) for 2011 is projected to be $218.57, a 5.2% increase over 2010.

Moreover, the addition of the new ships allow older ships to be spun off to other overseas brands, generating additional revenues and further penetration of less mature overseas markets.  International markets are now growing passengers faster, percentage wise, than the core North American market.

The new ships are the Apple iPhone’s of the sea.  They generate excitement, helping to get cruising back to front and center so vacationers are thinking “that would be fun.” This helps chip away at the edges of the “hard core” resistors, those 55% of the U.S core market who have never cruised.

Cruise line stocks are soaring

It may be odd to think of a ship soaring rather than sailing, but that is what cruise line stocks have been doing over the past six months.  In fact, Royal Caribbean’s (RCL) price per share (pps) has risen 87% from July lows of $23 to recent highs of $43.  Likewise Carnival’s (CCL) pps has risen from July lows of $30 to recent highs of $44.

Who are the captains at the helm of this stellar run?

1. A series of great earnings reports and positive forward guidance by the major cruise lines.

  • At RCL, net income increased 55% in the fiscal third quarter as compared to the same quarter the year prior.  A similar story at CCL, with a 22% increase in third quarter net income.
  • As for Norwegian Cruise Line (NCL), in addition to reporting it will build two more new cruise ships, it turned in a third quarter EBITDA improvement of 21.4% versus the same period the year prior.

2.  A sustained resumption of CCL’s dividend, thanks to improving margins as a result of a steady increase in demand and continued success in ongoing cost reductions.

3.  A series of analyst upgrades, including those for CCL by Wall Street stalwarts such as Barclays and Goldman Sachs.

4. And perhaps anticipation from the October 26, 2010 announcement of NCL’s own initial public offering (IPO).

Rudy Martin, Managing Partner at Latin Capital Management and frequent contributor to Forbes Magazine and recently produced an intriguing video that discusses the positive long term fundamentals of the industry.

As with any investment, keep an eye out for “icebergs” such as increasing fuel costs, a potentially slower European market or unforeseen impacts at the margins.  For example, from on-the-fence potential cruisers giving the idea of a cruise a second thought after the Carnival Cruises’ Splendor was disabled by an engine fire (Carnival reported November 16th the total impact from voyage interruptions and repair expenses will impact fourth quarter earnings by a negative 7 cents).