Carnival Cruise Lines has reported record revenues and net income for the three-month and nine-month periods ended August 31, 1990.

Net income for the third quarter was $107.2 million on revenues of $482.9 million, compared to net income of $84.4 million on revenues of $405.2 million for the same quarter in 1989.

As a percentage of revenues, net income was 22.2 percent for the third quarter of this year compared to 20.8 percent last year. 

For the nine months ended August 31, Carnival reported net income of $187 million on revenues of $1,095 billion, compared to net income of $172.3 million on revenues of $921.6 million, for the same period last year.

For the three months ended August 31, 1990, Carnival carried 295,898 passengers, achieving a fleet-wide capacity of 113.1 percent compared to the third quarter of 1989 when occupancy was 112.2 percent.

For the first nine months, Carnival carried 718,372 passengers, achieving a fleetwide occupancy level of 108.3 percent compared to 606,189 passengers last year when occupancy was 108.6 percent.

The increases were attributed to the new capacity provided by Carnival's Fantasy, which entered service in March, as well as to the addition of 490 berths to Holland America Line's Westerdam which re-entered service in March, following a six-month drydocking for lengthening.

Predicts Record Growth

In a prepared statement, Mickey Arison, President and newly appointed Chairman of Carnival following the retirement of his father Ted Arison, said that "despite a weakening economy, increasing oil and fuel prices, and the high level of discounting in the industry, we believe the cruise segment of our business will perform well. Based on advanced booking patterns, we expect to have a strong fall, and I suspect the cruise industry as a whole may well achieve record growth in 1990."

A spokesperson for the Carnival, however, said that he had no numbers on the industry's growth so far this year, but underlined that the potential for growth was there based on the introduction of new tonnage, most of which will come into service in the second half of the year, he noted.

Stock Continues Slide

In spite of Carnival's solid performance, its stock has continued to slide and traded for around $10 at press time.

The spokesperson said that the financial markets were overestimating the impact of the recession and that even in a "worst scenario" analysts expected Carnival to earn $1.60 per share in 1991 which barely gives it a PE ratio of 7 based on a trading price of $11.50. He said that at 12 times earnings, which he said was still a low ratio, the share should trade for $21.

According to Carnival, the cruise industry has no established financial track record and no history of ability to perform in a recessionary period. "It (Carnival) is also a new stock," the spokesperson said, "and the street doesn't know where to put us, whether with hotels and lodging or in transportation."

According to the spokesperson, Carnival has been able to secure some of its fuel supply at previous rates and he did not believe that the current high price level would be maintained.

He emphasized that fuel represented a small portion of Carnival's operating expenses, merely three percent before Iraq invaded Kuwait and four percent now. (Cruise operating costs in 1989 were $479 million. A one percent increase would represent nearly a $5 million hike in fuel costs from $14.37 million to $19.6 million.)

The spokesperson also said that Carnival is the largest purchaser of airline tickets in the country and that most of its airlift was under contract although some of these will soon be up for renewal.

Crystal Ball

A survey of analysts at different firms showed that a further slowdown in the American economy in the months ahead is practically a given. Still, based on nearly identical assessments of the near future, analysts' recommendations varied.

In its October 5 Investment Survey, Value Line wrote that "the probability of a recession, or at the very least a near miss, is growing.

Value Line wrote that the escalation in Mideast tensions, falling real estate values, spreading regional downturns, and mounting woes in the banking system, which promise to further undermine consumer confidence, are indicative of leaner times ahead.


At Alex Brown & Sons, analyst Sally Smith has put a "sell" rating on Carnival which she expects will underperform the market in the near term. She said that she was concerned about the economy and expected that there will be a recession and that discounting will increase.

Smith also expected cost increases in the coming year especially as airlines push for higher prices.

She expected Carnival to do well compared to other cruise lines and said that the company will "come through."

"The difficult period ahead may even represent new opportunities for Carnival," said said, "if others are having problems."

Smith also said that while new ships may do fine, she was concerned about the older vessels being unable to attract passengers. "In the last recession, cruise industry growth did slow down," Smith said. Smith attributed her concerns to a range of factors which in her opinion do not bode well for the near future, including the weak dollar, inflation and lack of consumer confidence plus the Middle East crisis and the Federal Budget. "The whole environment is worrisome," she said, "the entire financial sector is in a difficult period."

Smith said perhaps the best thing would be to get into the recession. "Once you are in a recession," she said, "investors will know where they are and can look forward to the recovery. Then, things will start to pick up," she said.


David Magee, Assistant to Analyst Jim Parker, at the Robinson-Humphrey Company, said that the company was neutral on Carnival in the short term and that they expected the stock to perform in line with the market over the next six months. Over the long term, however, they expected the stock to recover and rated it with a "buy" recommendation.

"Companies that are perceived to be cyclical are hurt the most by downturns in the market," Magee said. "If there is more negative economic news, Carnival's share may go down even further," he added.

While Magee noted that Carnival had reported record earnings during what he called a soft economic environment, he cautioned that the "market looks ahead."


Ram Capoor, a special situations analyst at Morgan Stanley had a "buy" rating on Carnival stocks. He said that he recommended Carnival to those who are willing to take some risk. Over the next 12 to 24 months, he expected Carnival to go as high as $18 to $20. "The world has changed," Capoor said, who did not expect the stock to return any time soon to the $24 - $26 level where it was listed earlier this year.

Capoor said that while earnings for next year were relatively uncertain, there was still a range where Carnival earnings were likely to be.

Capoor said that if there is a recession in 1991, it is unlikely that there will also be a recession in 1992. "The world does not end and begin with 1991 earnings," he said. "1992 could be a very strong year." He predicted that strong industry growth would continue through 1995.

"Back in the early 80s, the people who were hurt were not the big companies," he said, "but the little ones." Capoor said that Carnival was least likely to get hurt among the cruise lines.

Capoor said that even though the economy was in a recession, the cruise industry was less likely to be hurt inasmuch as its product has good value and travel agents have strong incentives to sell cruises.

Capoor disputed that there is overcapacity of berths in the cruise industry. "Moreover," he said, "having new ships come into service is positive for demand. New ships create new demand," Capoor emphasized. He also said that there was not that much new capacity coming into service in 1991 as the new Monarch of the Seas will only enter service midway through the year and Costa Cruises' new ship at the end of the year.

Capoor also disputed that there was any widespread discounting in the industry and said that travel agents tend to complain and that last fall Carnival's shares fell from $26 to $17 as well only to go back up again.

Solid Longer Term Value

Bear Stearns & Co, which was the manager of Carnival's public offering in 1987, and has a Managing Director who is also a Director of Carnival Cruise Lines, said in its latest report released today that cruise related business for Carnival remained solid and that bookings averaged between 13,000 and 16,000 per week.

The report stated that other than typical off season discounts during the fall, Carnival has not had to slash fares to drive bookings.

Bear Stearns also said that current air negotiations suggested an increase of five to six percent (due to higher fuel costs) in 1991. The company said that it expected the increase to be absorbed by a modest yield improvement.

On fuel costs, the report said that Carnival was hedging 40 percent of its fuel costs and that the company has absorbed all but a modest incremental expense through hedging and yield improvement.

At worst, the report stated, the additional cost burden could change Carnival's earnings per share forecast for 1991 from $1.85 to $1.73. For 1990, earnings per share are expected to be $1.65 compared to $1.44 in 1989.

The report concluded that for those with a time horizon beyond 12 months, the shares continued to represent solid longer term value.

In a press interview, Arison was quoted as saying that in the 1982 recession, Carnival bookings did not decline. "We offer a good value, an all inclusive vacation that people who already plan to go on vacation flock to in penny-pinching times," Arisen said.

Arisen was also quoted as saying that analysts concentrate more on investors' psychological reaction to higher fuel prices and an impending recession and not on fundamentals.

Cruise Industry News Email Alerts