Carnival's Brand Equity Intact
We expect stabilizing pricing in 2020 despite ongoing economic struggles abroad.
Despite facing multiple headwinds in 2019, including Cuba travel restrictions, Hurricane Dorian, and shipyard delays, Carnival (CCL)/(CUK) was able to eke out 3% earnings per share growth for the full year. The fourth quarter performed ahead of our expectations on price and cost metrics, with an as-reported yield decline of 3.6% and cost (excluding fuel) increase of 1%, better than the 4.8% decline and 2.5% increase we had modeled, respectively. These factors led to adjusted EPS of $4.40, $0.14 ahead of our forecast. However, the company’s 2020 outlook was more tepid than we anticipated and includes yields that decline 1.5%. This is below the 0.5% increase we were looking for but still represents an improvement over the 2.6% yield downtick Carnival experienced for 2019. Costs excluding fuel that fall 0.5% in 2020 were also less favorable than the nearly 2% decline we predicted, but higher spending on marketing to elevate brand awareness should ultimately support more interest in cruising, helping to stabilize pricing.
Booking commentary indicated that demand uncertainty was not escalating, as booking volume was running higher with prices that were in line for full-year 2020 over the last eight weeks. Even with ongoing weakness in key markets like the United Kingdom (Brexit), Alaska (capacity growth), and Europe (weak economics), our long-term outlook is unchanged and our $58 fair value estimate is intact. We view the shares as undervalued, trading at 11 times the midpoint of management’s 2020 EPS guidance. However, Carnival’s valuation (and multiple) could remain depressed until better earnings growth comes into view, which investors could have more clarity on over the course of 2020.
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.