Here's Why Carnival Shares Can Sail To New Highs After Earnings

NEW YORK (TheStreet) -- Carnival Corporation (CCL), which is due to report second-quarter earnings results Tuesday before the opening bell, looks poised to sail to new highs even though revenue is expected to dip lower.

With Carnival shares now trading near 52-week highs, waiting for a lower price would ordinarily make sense. But with the Miami-based cruise ship operator benefiting from strong cruising demand and higher on-board spending, Carnival has plenty of wind in its sails to grow profits in the quarters ahead. Better still, the company can achieve this even as oil prices have moved higher in the past three months.

The concern, as oil prices trend higher, is that this would impact Carnival's future performance, given that fuel expenses represented 14.6% of its 2014 sales. So far this fiscal year, fuel costs account for just 9.0% of sales. But in a March appearance on CNBC, Arnold Donald, Carnival's CEO downplayed the notion on Carnival's reliance on low fuel costs.

"The reality is, very little of it [earnings beat] was helped from lower fuel costs," said Donald. Instead, he attributed his company's strong operating performance to high on-board revenue coupled with lower expenses. First-quarter on-board revenue, for instance, grew 8.5% year over year.

Moreover, net revenue yield, a closely-watched industry metric that tracks passenger spending and ticket prices, climbed 2% year over year, topping analysts' estimates of 1%. It also exceeded the company's December guidance of flat to up 1%.

The yield increase is "being driven by demand-creation and great on-board experiences," says Donald. Much of which offset negative impacts of the strong U.S. dollar, which devalued sales in overseas markets.

This means internal factors like on-board customer experiences, among other things, are what's driving Carnival's growth, which includes seven consecutive quarters of earnings beats. During that span, Carnival has steadily increased its operating margins, including a jump of 5.6 percentage points in the first quarter.

And this explains why Carnival stock is near its 52-week high. So, ahead of its second-quarter earnings results Tuesday, investors can still do well owning Carnival stock today, given that Carnival continues to execute in a manner that grows shareholder value.

For the quarter ended May, earnings are projected to climb 60% year over year to 16 cents a share, while revenue is expected to be $3.5 million, down 2%. For the full year ending November, earnings are projected to climb 27% to $2.49 per share, while full-year revenue of $15.63 billion would mark a year-over-year decline of 1.6%.

From my vantage point, despite Carnival stock already trading at a premium P/E of 28, which is seven points higher than the average S&P 500 stock, this is supported in that both quarterly and full-year earnings are growing at such strong rates despite the projected decline in revenue.

Plus, based on fiscal 2016 consensus earnings estimates of $3.24 a share, implying that analysts expect a 30% jump in earnings, this means Carnival's full-year 2016 profits are projected to accelerate by three percentage points above 2015 levels. Coupled with its average analyst 12-month price target of $53.28, suggesting Wall Street expects 13% gains in the stock price, Carnival stock looks poised to sail to new highs.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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