Carnival Corporation (CCL) filed its quarterly report last week (conference call with analysts was the previous week), giving investors more detailed information regarding the company's Q2 performance. In this article, we break down the company's financial statements and give our outlook on Carnival stock.
Q2 Operating Results
At first glance, the company's operating results appear unimpressive. For the three months ended May 31st, 2017, the Carnival Corporation recorded earnings per share (EPS) of .52 and net income of $379 million. This is significantly lower than the company's second quarter EPS from last year, .81 per share, and net income of $605 million. The difference in second quarter net income year-over-year is $226 million.
It's All About Fuel
Carnival Corp. uses a derivative strategy known as zero-cost collars to help hedge against fluctuations in one of its largest input costs: fuel. For those not familiar with zero-cost collars, it is a strategy which allows a company (or an investor) to create price ceilings and price floors for an asset.
In the case of Carnival, the company buys call options on Brent crude oil to hedge its fuel costs. Simultaneously, the company sells put options on Brent crude oil to collect a premium which covers the costs of the call options. The net effect is that the company is able to mitigate the risk of increasing fuel prices without having to tie up significant capital in these trades.
Changes in Carnival's Derivatives Negatively Distorted This Quarter's Earnings
For the second quarter of 2016, Carnival Corporation realized $171 million in gains from its fuel derivatives. Naturally, this distorted the company's second quarter earnings. In the second quarter of 2017, the company had a realized loss of $53 million from the same fuel derivatives. When added together, Carnival's gains and losses from its fuel derivatives account for a $224 million difference in earnings between Q2 of 2016 and Q2 of 2017. Therefore, the business's underlying economics did not actually deteriorate when compared to its Q2 earnings from last year. Additionally, the company experienced nominal year-over-year growth in its revenue accounts for cruise and tour fares.
Carnival Stock Rating (CCL)
CCL currently trades at $65.57 per share. As a large player in the tourism industry, its operating performance is sensitive to fluctuations in growth rates of the world's major stalwart economies (North America, Europe, etc). Carnival stock trades at a price-to-earnings ratio of 17.4 -- a moderate discount to the S&P 500's P/E ratio of 25.63. Furthermore, Carnival Corporation offers shareholders a 2.5% annual dividend yield. This makes the company a much more attractive investment than its direct competitors like Norwegian Cruise Line Holdings (NCLH), which does not pay dividends, or Royal Caribbean Cruises (RCL) which has an annual dividend yield of 1.75%.