Carnival’s second-quarter revenue increased 5% to $6.7bn ($6.7bn expected), helped largely by increased prices but also by higher capacity.
Underlying cash profit (EBITDA) increased from $1.5 to $1.6bn, slightly ahead of guidance, despite a 27% increase in fuel costs.
Free cash flow generation also improved, up from $1.5bn to $1.8bn. Net debt fell from $24.7bn to $22.6bn over the first half.
Full-year guidance for underlying cash profit has been reduced from $7.2bn to $7.1bn, assuming oil prices stay at current levels.
Carnival has paid out $0.4bn in dividends so far this year and completed around $0.5bn of share buybacks.
The shares were down 8.0% following the announcement.
Our view
Carnival saw strong momentum carry on into the second quarter. However, with oil prices easing following diplomatic progress in the Persian Gulf and investor sentiment recently revived, markets were disappointed by a further small downgrade to this year’s profit guidance. Carnival’s still managing to push through price hikes, but the pace of increases is slowing, and costs are still expected to rise this year.
We’re still encouraged by the resilience in cruise demand, with 93% of this year’s cabin space already reserved. And although it’s early days, demand for future sailings also looks strong. Fleet growth is also on the cards, but no new ships are due to launch until 2027. The company has set out some ambitious medium-term performance targets driven by initiatives including upgrades to the existing fleet and a wider range of routes and itineraries.
Remember, cruising can be a fickle business, and there’s no guarantee that demand will align with planned capacity growth. Geopolitical unrest and economic uncertainty remain the key risks to Carnival's target of growing earnings per share by 50% between 2025 and 2029.
There remain plenty of question marks around the deal between Iran and Washington, and regional tension in the Middle East remains high. Just the mention of disruption in the Strait of Hormuz could send oil prices soaring again. A prolonged dip in consumer spending power means that island hopping in the Caribbean could move down the pecking order when it comes to spending priorities.
As it stands, however, management is confident enough to keep the recently reintroduced dividends on the table, with share buybacks entering the mix, too. In total, $14bn worth of shareholder returns are targeted by 2029.
That’s underpinned by improving cash generation, while continued focus on strengthening the balance sheet suggests an element of prudence. However, with economic uncertainty as high as it is, it’s worth remembering that no shareholder returns are guaranteed.
Carnival is a market leader in an industry with a long-term track record of growth, and it’s now putting together the building blocks of further success. If it can meet its targets, we think there’s attractive upside on offer. However, sentiment towards the sector is highly sensitive to geopolitical events and today’s uncertainty around oil prices and the economy adds more risk than usual.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
According to Sustainalytics, the company's overall management of material ESG issues is strong, with a robust governance structure and reporting framework in place. However, Carnival still faces significant exposure to risks linked to emissions, effluents and waste as well as quality and safety issues. Carnival has implemented carbon reduction programmes, but shipping is likely to be one of the last forms of transport to be decarbonised.
Carnival key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.