This may be the lull before earnings season starts up in earnest in a few weeks, but that doesn't mean that there's a moratorium on financial updates. Carnival (NYSE: CCL)(NYSE: CUK) reports its fiscal third-quarter results before the market opens on Monday.
The final trading day of the month -- and quarter -- won't be sleepy. Carnival's report covers the months of June, July, and August. This is the peak travel season for the cruise industry. Expectations may be high and rising, but Carnival has been up to the challenge before.
Earning its sea legs
A lot is riding on next week's fresh numbers. The world's largest cruise line operator may be trading essentially where it was at the start of this year, but it did more than double last year.
How big is the cruise line stock's fiscal third quarter? Its guidance in June calls for a reported profit of $1.15 a share, the lion's share of the $1.18 a share it's targeting for all of fiscal 2024. Analysts are holding out for a little more, targeting a quarterly profit of $1.16 a share and annual earnings of $1.21 a share.
Exceeding a company's guidance can be a risky game for analysts, but they have consistently fallen short of reality over the past two years. Lately the difference between what Wall Street pros are modeling and what Carnival ultimately delivers is widening.
| Period | EPS Estimate | Actual EPS | Surprise |
|---|---|---|---|
| Fiscal Q4 2022 | ($0.87) | ($0.85) | 2% |
| Fiscal Q1 2023 | ($0.60) | ($0.55) | 8% |
| Fiscal Q2 2023 | ($0.34) | ($0.31) | 9% |
| Fiscal Q3 2023 | $0.75 | $0.86 | 15% |
| Fiscal Q4 2023 | ($0.13) | ($0.07) | 46% |
| Fiscal Q1 2024 | ($0.18) | ($0.14) | 22% |
| Fiscal Q2 2024 | ($0.02) | $0.11 | 650% |
Data source: Yahoo! Finance. EPS = earnings per share (adjusted).
Let's say that after seven consecutive bottom-line beats -- including at least double-digit percentage beats in each of its last four reports -- Carnival lands exactly on its guidance. A lot can happen when earnings per share climb 34% to $1.15 for the cruiser's biggest quarter. Carnival is trading for 25 times trailing earnings right now. The next time the market's opening bell rings, that multiple would drop to 18.
Image source: Getty Images.
Riding the wave
There are some good reasons to suggest another beat is coming. Two analysts have raised their price targets this month, largely to get ahead of the financial update coming at the end of this month. Last week it was Steven Wieczynski at Stifel Financial believing that another "beat-and-raise" performance could send the stock higher. Looking out to next year, he sees the potential for Carnival to earn a lot more than the $1.58 a share that his fellow analysts are currently modeling. In other words, Carnival could be trading for a lot less than 12 times forward earnings.
A day earlier it was Ben Chaiken at Mizuho Financial Group with the target boost. He sees Carnival's improving core underlying trends and this summer's drop in fuel prices as bullish catalysts for a strong fiscal third-quarter report. Carnival is his firm's top pick in the leisure sector. The two new revised price targets from last week imply that Carnival stock has 34% to 45% in near-term upside.
Analysts see Carnival's revenue hitting a quarterly record of $7.83 billion, 14% ahead of where it landed last summer and 20% more than its pre-pandemic peak. There is certainly room for a beat here, too, but the best shot for a blowout beat comes from the bottom line, given the scalable nature of the business and all the favorable tailwinds behind Carnival's fleet.
Will Carnival top the record $8.3 billion in customer deposits it was holding at the end of May? Don't bet on it. A lot of that money went into the busy summertime sailings. That metric dipped sequentially between the fiscal second and third quarters last year, too. Will Carnival have retired more than the $6.6 billion of debt that it has repurchased over the last five quarters? This is a smarter bet. Carnival may even follow its closest rival and reinitiate its quarterly dividend, but its best use of its newfound wealth right now is to pare back or at least refinance its substantial leverage.
With cruise line stocks rallying in recent weeks, Carnival is going to need more than just a good quarter to keep the upticks coming. Thankfully for investors, the fundamentals and momentum are on their side right now.
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Rick Munarriz has positions in Carnival Corp. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
