Has Carnival Finally Turned the Corner?

Carnival  surprised Wall Street this week by posting an increase in profits for its fiscal second quarter. But the stock fell anyway, as investors are demanding evidence that a real rebound is under way.

With that in mind, let's see how the cruise ship operator did this quarter, and whether shareholders can expect a quick turnaround for the business.

Image source: Carnival

Better-than-expected earnings
Broadly speaking, the quarterly results were better than most people expected. Profit improved by $0.03 a share from last year's $0.07 figure. Wall Street was instead bracing for another drop in earnings. Sales came in higher than expected as well: Carnival posted $3.63 billion in revenue while analysts had targeted $3.61 billion. 

There were a few key drivers behind that outperformance. For one, the European business saw solid demand growth thanks to a "gradually improving economic environment," as Carnival put it in a press release. That's especially good news for the company because it has a much bigger growth opportunity there than in its North American business, where a higher percentage of the population has already tried out a cruise vacation.

The second factor behind this quarter's profit beat was fuel costs. Those dove by almost 4%, which helped pull overall cruise expenses lower by 1%. That helped push earnings up to $0.10 a share as compared to the zero cents that Carnival had forecast back in March. 

A turning point?
CEO Arnold Donald said in a press release that the profit growth Carnival managed represents a financial "inflection point" toward higher earnings in 2014 and potentially bigger profits in the years ahead. Investors have to hope that's true: Carnival has seen its annual earnings crater by more than 50% from a high of almost $3 per share in 2008.

CCL EPS Diluted (Annual) data by YCharts

The good news is that the company is finally seeing an end to those sinking results. In its updated guidance, Carnival said that profit should reach about $1.70 a share this year, above the $1.58 it posted in 2013. Crucially, bookings for the rest of 2014 are tracking at slightly higher ticket prices than last year, the company announced.

Not an easy ride
Still, a quick recovery isn't in sight, even assuming more improvement in the global economy. Fuel costs should tick higher next quarter, which will pinch profits. And revenue is set to fall slightly as more competition in the Caribbean puts pressure on sales results. In fact, earnings for the summer months may come in well below Wall Street's estimates, according to the company's updated guidance.

That weak outlook for the upcoming vacation season means that it is still too early to call this week's earnings beat the start of a sharp turnaround. Carnival's management has plenty of work ahead in getting profitability back up to where it was just a few years ago.