Carnival's ( CCL) second-quarter earnings were a shot across the bow, but some say now's not the time to give up on cruise stocks. The company, which operates Holland America, Cunard and Carnival cruise lines, said its second-quarter net income fell 34% to $127.8 million, or 19 cents a share, from $194.2 million, or 33 cents a share, a year earlier. Wall Street analysts had expected 22 cents a share, according to Thomson First Call. Sales rose 35% to $1.34 billion. Carnival predicted third-quarter earnings will be between 83 cents and 87 cents a share, lower than the 93 cents analysts were expecting. Howard Frank, Carnival's vice chairman and chief operating officer, said in the company's conference call: "We can't recall ever being challenged by so many exogenous events affecting our business," referring to the flu virus that spread among cruise ships recently and the Iraq war. "The impact of these events was difficult to estimate, but clearly significant." The company also said earnings were reduced by 2 cents due to litigation charges related to the dual listing of shares after the merger with P&O Princess of Britain, completed in April. Princess's quarterly earnings and sales were responsible for shaving off another cent from Carnival's per-share profit.
Carnival's yield, a key performance measure for the cruise industry, which accounts for ticket pricing and occupancy rates, was down 8.6% in the quarter as the company reduced prices in an effort to attract tourists, while more travelers stayed home amid war and economic concerns. Frank expects yield growth next year, "but by how much, it's hard to say." He noted travelers are booking cruises increasingly closer to the departure date, making it harder to predict future performance. "It's tough to call what will happen next year, but we're getting close to a bottom." He bases this assumption on an encouraging factor: the 54% increase in bookings in the period between May 19 and June 22, which could "set the stage for a stronger financial performance in 2004." "The concern was that second and third-quarter results would be weak, affecting 2003 earnings," said Paul Keung, analyst at CIBC World Markets. "But now that we see improving visibility, investors will take a longer-term view in the stock, even though it has appreciated so much this year." Keung upgraded the stock to market outperform, from market perform, after the announcement. Carnival has climbed 25% year to date.
But the industry still faces fundamental issues, namely elevated capacity, or how many ships operate in the sector, compared to demand. Despite a slowdown in travel spending, capacity growth rates still hover around 10% for the industry overall, with Carnival's rate being the highest at around 18%. "Too much volume hurts pricing. They have to deal with this issue, maybe taking older ships into new smaller markets," said Cleopatra Murphy, an analyst at Ryan Beck & Co., who has a market perform rating for the company. In analyzing Carnival's current strategy, Murphy believes it should try to create demand in new ways, such as implementing more onboard shops, which carry high margins and are therefore a big component of the bottom line. "They should invest and innovate on that." Shares of Carnival finished down 97 cents, or 3%, at $31.04.