Carnival (CCL): Will Growth Initiatives Offset Headwinds?

On Jul 5, we issued an updated research report on Carnival (LON:CCL) Corporation (NYSE:CCL) .

The company reported strong second-quarter fiscal 2016 results on Jun 28, wherein both earnings and revenues beat the respective Zacks Consensus Estimate. However, the company tightened its full-year 2016 adjusted earnings per share view. It now expects earnings in the range of $3.25 to $3.35 compared with $3.20–$3.40 guided previously.

Scope

Carnival is well positioned as the global leader in the cruise industry with solid growth prospects. The company’s brand-building efforts and other promotional activities are expected to boost bookings.

Meanwhile, its strategy to tap into the fast growing Asian market bodes well as an increasing number of ports and tourist destinations in Asia present tremendous growth opportunity for the cruise industry.

Notably, effective May 1, 2016, Carnival’s newest brand Fathom made history by initiating travel to Cuba. With bookings likely to be strong this fall in Cuba, revenues should increase significantly. Further, the company is sailing to markets like Mexico and Bermuda, where demand is expected to ramp up extensively.

Moreover, Carnival expects revenue yields (in constant dollars) to continue improving in second-half of 2016 supported by marketing initiatives and a better booking environment. Notably, for the rest of 2016, cumulative advance bookings are well ahead of the year-ago level at marginally higher prices. Thus, the company expects revenue yields to improve by 3.5% in 2016, better than 3% expected earlier.

Risks

However, Carnival’s earnings have been impacted by a strong dollar in the recent past. Further, with a major portion of Carnival’s revenues coming from Asia and Europe, the company is highly exposed to the impact of negative currency translation. Though the dollar weakened slightly in 2016 compared to the previous year, the impact is still quite significant.

Notably, the company faces competition from Diamond Resorts International, Inc. (NYSE:DRII) , Royal Caribbean Cruises Ltd. (NYSE:RCL) and Norwegian Cruise Line Holdings Ltd. (NASDAQ:NCLH) in the Leisure and Recreational industry.

Meanwhile, although the marketing initiatives undertaken by the company to enhance bookings will drive the company’s profits over the long haul, these investments are hurting margins in the near term. Further, a slowdown in the Chinese economy, where the company has significant presence, is also likely to dent revenues.

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