After much effort and investment, Carnival’s strategy to revive growth is at risk. Will the company be able to manage a turn around in the near future? Credit rating agencies and stock analysts don’t think so.
Carnival Corp. & plc revealed that it now expects its annual revenue to be 2 to 3 percent lower than previously projected, due to cruise cancellations, high fuel prices, as well as falling currency exchange rates, according to a May 20 company press release.
Carnival had lowered its prices to sell more tickets and achieve greater sales. However, the company implies in its release that it might have lowered its prices to a point where its prior projected revenue is unachievable. “Current cruise ticket pricing for the company has driven higher booking volumes however, at the same time, it has led to lower than anticipated net revenue yields which has resulted in reduced earnings guidance,” it said in its release.
Carnival’s Credit Rating at Risk
In response, on May 21, rating agency Moody’s Corp. put Carnival’s “A3 senior unsecured rating under review for a possible downgrade.” At the same time, the rating agency revised Carnival’s outlook to negative.
Moody’s based its outlook on the cruise company’s weak outlook in Europe, as well as the intense media coverage around mechanical problems aboard several Carnival ships. In February, an engine room fire aboard the ship Carnival Triumph left the ship powerless and adrift in the Gulf of Mexico for days without working toilets, before finally being towed to port in Alabama.
Standard & Poor’s (S&P) had previously announced on March 18 that it had changed Carnival’s outlook from stable to negative. S&P expects Carnival’s revenue to decrease because of mechanical problems during sea voyages, requiring its ships to be repaired, resulting in an increase in the firm’s expenses.
According to a May 21 report on the StreetInsider.com website, Wells Fargo & Company lowered their outlook on Carnival Corp. from Outperform to Market Perform, given the “ship incident issues in 2012 and 2013,” as well as the challenging economy.
A list published on the StreetInsider.com website, summarizing results from recent research reports, shows twelve downgrades, including by HSBC Holdings plc, UBS AG, Nomura Securities Co., Goldman Sachs Group Inc. and JPMorgan Chase & Co. Most of the downgrades were to a neutral rating, indicating that the rating companies feels the stock is fairly valued at current levels, which could imply that the investor should consider selling the stock.
Despite the setbacks, both S&P and Moody’s consider Carnival Corp. to have a low risk profile, based on the company’s 50 percent cruise ship market share and skilled management team.
Announcement Affecting Stock Price
Carnival’s May 20 press release states that its earnings per share (EPS) are projected to decrease from between $1.80 and $2.10 to between $1.45 and $1.65.
In response the announcement, the firm’s stock price (NYSE: CCL) dropped from a closing price of $35.32 on May 20 to a closing price of $33.81 on May 21, or 4.28 percent. Shares have continued to fall this week and opened Thursday May 23 at $32.61. The stock is now down over 10 percent for the year.
Latest Earnings Release
On March 15, Carnival reported first quarter 2013 revenues of $3.6 billion, in line with the first quarter of 2012, according to the company’s earnings release. The company reported a non-GAAP profit of $65 million, or $0.08 diluted earnings per share (EPS), before adjustments. After U.S. GAAP adjustments, including unrealized losses of $28 million on fuel derivatives, the result was a net income of $37 million, or $0.05 EPS.
Given the $37 million in profit, Carnival declared a $0.25 dividend per share (resulting in a total payout of $194 million) for shareholders of record on May 24, with a payment date of June 14.
Carnival Corp. has said it will report on its second quarter earnings in late June.