William Blair downgrades Carnival to 'hold'

William Blair lowered its rating for Carnival Corp. to 'market perform' (hold) from 'outperform' (buy) in the expectation that the company's yield gap versus peers will widen.

Carnival reduced its earnings outlook for the rest of 2019, with constant-currency net yields now expected to be flattish to slightly down in the third quarter, compared to Wall Street's consensus expectation of up 1.5% to 2%, and down in Q4, compared to the consensus of up 1% to 1.5%. This translates to full-year net yields of flat versus prior guidance of up approximately 1%, analyst Sharon Zackfia said in a note.

Greater exposure to Europe

'Carnival’s flattish yield expectation compares to underlying guidance for mid single-digit gains at Royal Caribbean and NCL,' Zackfia continued. 'We attribute Carnival’s underperformance mainly to its nationalistic brands and greater exposure to Europe, which continues to be a source of uncertainty relative to the global passenger sourcing used at both Royal and NCL.'

While the brokerage believes Carnival stock remains 'attractive on a longer-term basis from a pre-market valuation of 11 times new fiscal 2019 EPS guidance, the ongoing geopolitical uncertainty in Europe and today’s lowered guidance are likely to put the stock in a show-me state and limit shareholder returns over our rating horizon,' Zackifa said.

She added that cumulative advance bookings for 2020 are at flattish prices, versus the consensus expectation for an approximate 2% yield, albeit with bookings well ahead of the same point last year.

Pricing strategy 'not manifesting itself as planned'

'Maybe most tellingly, it appears that Carnival’s strategy to drive improved yields in Europe with better pricing on close-in demand following early discounting to drive bookings is not manifesting itself as planned,' Zackfia said. 'As a result, higher yields in North America and Australia are expected to be offset by weakness in Europe as well as Asia.'

CCL shares were off about 8% in Thursday afternoon trading.

Posted 20 June 2019

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Anne Kalosh

Editor, Seatrade Cruise News & Senior Associate Editor Seatrade Cruise Review