Carnival To Benefit From Recovery In Cruise Demand; Argus Upgrades

Celebrating a dearth of competitors and 12 consecutive quarterly earnings beats, Carnival Corp (NYSE: CCL) overcame a longstanding Hold rating from Argus Research and secured a long-awaited Buy. Argus issued a price target of $64 in anticipation of a rise in cruise demand.

A strand of industry mishaps had previously deterred sea vacationers and, consequently, analysts from doing business with Carnival, but the company’s leading industry position and late appeal to baby boomers justified a newly bullish stance.

Despite the company’s year-over-year increase in debt-to-capital ratio, Argus rated Carnival’s financial strength Medium-High — its second-highest rank — due to favorable operating leverage and expanding operating margins.

How The Numbers Look

The company’s fourth-quarter report revealed a 34-percent year-over-year increase in EPS ($0.67) and a 16-percent consensus beat. Carnival attributed this figure to a strong demand for cruises scheduled close to their departure date.

Company revenue rose 6 percent over the same period, and net yields beat a 3.1-percent consensus estimate with a 4.1-percent reading.

Throughout the entire year, revenue rose 4.3 percent and EPS nearly 29 percent.

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Additionally, Carnival shares increased more than 6 percent since Argus published its last note in December, and the firm sees room for continued growth.

Where It’s Projected To Go

Carnival is riding a powerful wave in the cruise industry, which has expanded over the decade by an annual average of 8 percent. Together with Royal Caribbean Cruises Ltd (NYSE: RCL), it dominates about two-thirds of the total market.

The company maintains a slight edge over the industry’s average P/E, but Argus believes its present position justifies a higher multiple. Noting that the stock is trading 14.4-times above the firm’s FY 2017 EPS estimate, analysts forecast a 2017 dividend of $1.55.

Guidance seems to align with their predictions, indicating strong advanced reservations and the potential for shares repurchases. Management also confirmed that advance bookings were up for the first three quarters of 2017 despite higher pricing.

Based on Carnival’s free cash flow, Argus expects the company to keep raising its dividend and accelerating stock buybacks. It also projects an annual EPS of $3.90 — a figure above consensus and between 30 and 60 cents above guidance.

One risk to the assessment is the threat of terrorism and enduring safety concerns, which may prompt package cancellations by nervous travelers. Additional risks include rising fuel costs and potential economic downturns.

Carnival shares were trading down 0.3 percent around $55.84 at the time of publication.