3 Things Carnival Wants You to Know

Investors weren't excited about Carnival's (NYSE: CCL) latest earnings report. The problem wasn't the cruise ship giant's operating results, which passed management's forecast for the second straight quarter and set a second-quarter record for the company. Instead, Wall Street decided to focus on two potential worries: rising fuel prices and a conservative short-term booking outlook.

CEO Arnold Donald held a conference call with analysts during which he and his executive team put the latest operating trends in perspective while diving into more detail about that growth forecast.

Below are a few highlights from that discussion.

1. The growth plan is working

"We continue to drive revenue yield growth by increasing demand in excess of our measured capacity growth through our ongoing guest experience, marketing, and public relations efforts."

-- CEO Arnold Donald

Carnival introduced two new ships that should help cruise capacity steadily increase along with, or at a slightly slower pace than, demand. These vessels introduced guest experience improvements such as a new Dr. Seuss themed water park, an IMAX movie theater, and bigger cabins for families. Carnival also raised its game on digital advertising while cutting costs aggressively.

These efforts resulted in surprisingly high revenue and low expenses. Net revenue yields increased 4.8% to mark an improvement over the prior quarter's 3.9% gain, while costs rose by a more modest 3.6%.

2. Booking trends

"At this point in time, cumulative bookings for the remaining two quarters of 2018 are slightly ahead of the prior year at higher prices."

-- CFO David Bernstein

Executives said overall booking volumes are running steady, with pricing trends holding up as well. There are a few areas of caution within that broader trend, though.

Demand for Caribbean trips is down and running at lower prices, which executives attribute to bad news out of Puerto Rico and continued challenges tied to hurricane rebuilding efforts in the southern Caribbean. Carnival expects these situations to improve over time, but this is an area worth investors' attention given that the Caribbean accounts for about one-third of the broader business.

The softness in its biggest market is being offset by strength in European and Alaskan itineraries, such that management believes sales will rise at a slightly faster pace than originally predicted, with net revenue yields rising 3%, rather than the 2.5% forecast back in March.

3. Operating trends are steady

"We think it's prudent to give the guidance we have for the back half, but we didn't modify our perception of the back half of the year."

-- Donald

Several analysts had questions about Carnival's outlook, especially about whether management is predicting a slowdown in demand or pricing trends over the next six months. After all, the slight uptick in 2018 sales expectations simply reflects the faster second-quarter growth, and so, extending those trends out appeared to imply that gains will be more modest in the second half of Carnival's fiscal year.

That's not the right takeaway, executives said. Instead, while there are many moving parts to this picture, including shifting demand in parts of the Caribbean and reduced lead times as we approach this year's hurricane season, Carnival's broader short-term outlook is steady, and the company's earnings downgrade was only due to rising fuel prices.

"We are seeing great booking volumes and excellent business trends," Bernstein said, "so, overall, we feel very comfortable" about the operating results.

Looking further out, Donald added that there were many long-term factors that should support robust earnings growth in the years to come, such as a rising number of people reaching retirement age between now and 2020, and increasing wealth in emerging markets.

10 stocks we like better than CarnivalWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Carnival wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.