Cruise line stock prices get choppy

[Jason]

Will too many ships spoil the profits?

Not according to Carnival Corp. and PLC (NYSE: CCL and NYSE: CUK).

The region's most profitable corporation and world's largest cruise company rebuffed analyst concerns about capacity and deployment of ships as it lowered fares for Caribbean cruises and reduced 2006 earnings guidance for the second time this year.

The question of how well Carnival and Royal Caribbean Cruise Ltd. (NYSE: RCL) - both based in Miami - do in the Caribbean is important to the South Florida economy, which is helped by a steady stream of vacationers staying in the region before and after cruising out of Port Everglades and the Port of Miami.

The global cruise market has long been centered on the Caribbean and was expected this year to capture 53 percent of the market, according to Cruise Industry News.

The trend in the cruise industry is to disperse the U.S. home ports for more ships in other locations, so the question is whether worries about the Caribbean will mean fewer new ships based here.

While Carnival cited higher fuel costs as it lowered expectations for earnings, hurricanes are also a factor.

There has been bad publicity for the cruise industry in recent months, including a fire on the Star Princess and ongoing coverage of sexual assaults and the disappearance of passengers on a variety of cruise lines.

Carnival analyst Scott Barry, with Credit Suisse in New York, said in a May 16 research note that the industry was on the "downside of a slippery slope" with respect to net revenue yield declines - the cruise-line equivalent to same-store sales statistics for retail stores. And that the last down cycle suggests it takes time - typically a couple of years - to recondition agents and consumers and return pricing power.

Barry also said that geographic and brand diversification notwithstanding, Carnival's most profitable brand, Carnival Cruise Lines, accounting for 34 percent of capacity, and a primary first-time cruiser was "seeing the brunt of softness."

JP Morgan in New York lowered is second quarter and full-year estimates for Carnival, citing in its own May 16 research note that fiscal year 2006 "is likely to be a challenging year in the industry due to weakness in the Caribbean."

Despite the cautionary note, JP Morgan championed Carnival's improving fundamentals and said "it is attractive for long-term investors."

Carnival spokesman Tim Gallagher this week shrugged off the effect that fare cuts could have on the bottom line, and said the Carnival Cruise Line brand that is offering the Caribbean cruise discounts is the low-cost provider and the operator with the highest profit margins in the cruise business.

"They can make pricing cuts and still make substantial profits," he said.

Overall, Carnival made $2.26 billion in profit for the year ended Nov. 30 on revenue of $11.08 billion.

In its May 16 conference call with analysts, Carnival denied it had any need to move ships around to meet shifts in demand, and said its only Caribbean facility in need of infrastructure repair was Cozumel, Mexico, which suffered a heavy blow from Hurricane Wilma.

"The silver lining is that Europe and U.K. pricing is holding up," said Howard S. Frank, vice chairman and COO.

But Frank conceded the psychological effect from the storms was underestimated.

"Last year's hurricane season is having a profound effect on booking patterns far more than we expected," he said.

Load factors in North America were down 6.2 points - all relating to the company's Caribbean business, Frank said during the conference call.

He attributed softening demand for cruise vacations in the second half of 2006 to higher gas prices and consumer pocketbook attitudes such as rising interest rates.

Looking forward, Carnival's branding mix, especially in Europe, remains important to the company, Gallagher said.

Despite substantial capacity increases over recent years, average load factors have remained high.

Frank said the four ships it is adding in 2007 are all focused on different markets, and that the company has the requisite cash flow to pay for ships over the next several years, with enough left over for stock buybacks and increasing dividends.

Lehman Brothers analyst Felicia Hendrix during the call asked if there were other ways to alleviate weaknesses, such as deploying ships in other places.

There are no major redeployment of ships right now, Frank said, adding that down cycles are not new to the company.

"There are periods where there are temporary swings in business," he said. "We start to redeploy ships and we find out the trade comes back very strong."

The latest warning comes on top of a reduction in earnings during first-quarter results back in March, when earnings guidance for the year stood at about $3 a share.

Carnival now expects full-year earnings of $2.65 to $2.70 a share, or about flat with 2005 earnings of $2.70.

Buying more ships:

Carnival's 12 brands operate 80 ships totaling about 139,000 lower berths, with 15 new ships scheduled to enter service between June 2006 and fall 2009.

In addition to Carnival Freedom entering service in March 2007, the 112,000-ton Carnival Splendor is scheduled to debut in spring 2008 and a 130,000-ton unnamed vessel is scheduled for the fall of 2009, Carnival spokeswoman Aly Bello-Cabreriza said.

Carnival believes it has enough berths in North America and elsewhere to support its fleet of ships, and isn't worried that too many new ships were ordered.

"We believe that the capacity increases to the industry are at a very rational level for both the industry and Carnival Corp. and PLC that can be easily absorbed," Gallagher said.

Royal Caribbean's new 160,000-ton Freedom of the Seas will soon pull into port. As of Dec. 31, Royal Caribbean operated 19 cruise ships with about 44,350 berths.

Carnival Corp. Chairman and CEO Micky Arison noted in a May 16 press release that the business model remains intact and should grow next year. He said during the conference call that his two biggest competitors are predicting flat earnings this year.

Carnival could be suffering from a shift in sentiment away from cruising, which traditionally has been viewed as a worry-free, safe vacation.

In addition to a fire on the Star Princess in March, which killed one passenger and injured 11 others, Carnival is one of 15 cruise lines involved in a congressional investigation into sexual assaults on cruises.

In a submission to Congress in March, 24 cases of missing people were also detailed.

Source: John T. Fakler, South Florida Business Journal

[JoeyandDavid]

Interesting article.. I am reminded of the story of the man who was asked why his product cost so much.. his response was because i can get the price!.

Thanks Jason