Option Trade
– Carnival Corp (NYSE:CCL) Calls -
Saturday, June 20, 2015

**OPTION TRADE: Buy the CCL Oct 2015 50.000 call (CCL151016C00050000) at or under $1.90. Place a protective stop loss at $0.75, and a pre-determined sell at $3.50.

by Ian Harvey

June 20, 2015

Introduction

Carnival Corp (NYSE: CCL), a cruise company that operates in two segments: North America and Europe, Australia & Asia, is scheduled to release its fiscal second-quarter earnings before the market opens on June 23, with the consensus calling for $0.15 per share. Analysts expect profit and sales above average estimates. The company earned $0.10 per share during the same period last year, and the stock is up 5.0% on the year.

CCL shares have been sailing over the recent year, as low oil prices have helped the company’s overall business. As is the case with all transportation companies, fuel costs represent a huge portion of the company's overall expenses, and while oil has begun to firm, they remain low enough for Carnival to continue to benefit. Also, the company is expected to be helped by higher bookings and online spending by consumers, particularly in the Caribbean, its largest market.

Last quarter, the company earned 20 cents per share, versus a flat quarter the previous year, a clear sign of how important energy costs are to the company. If Carnival hits the consensus for its second-quarter, it would translate to a year over year increase of 50%, and will be enough for the stock to maintain its current momentum.

Technical Details

Shares of Carnival Corp traded up 0.06% to close on Friday at $48.91. The stock had a trading volume of 3,574,291 shares. Carnival Corp has a one year low of $33.11 and a one year high of $49.21.

The stock’s 50-day moving average is $46.60 and its 200-day moving average is $45.60.

The company has a market cap of $38.13 billion and a P/E ratio of 29.210.

Earnings

Previous Earnings

Carnival Corp last posted its quarterly earnings results on Friday, March 27th. The company reported $0.20 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.09 by $0.11.

The company had revenue of $3.50 billion for the quarter, compared to the consensus estimate of $3.57 billion. The company’s revenue for the quarter was down 1.5% on a year-over-year basis. Analysts expect that Carnival Corp will post $2.4900 EPS for the current fiscal year.

Future Earnings

The company expects second-quarter net revenue yields in constant dollar to increase 2-3% from the prior year. Also, revenues are expected to improve in the following quarters driven by better booking environment, higher ticket pricing and the brand-building efforts and other marketing promotions.

Why Carnival Corporation?

It is expected that the Florida-based cruiser Carnival Corporation will beat expectations when it reports second-quarter 2015 results on Jun 23, before the opening bell. Last quarter, the company posted a positive earnings surprise of 122.22% driven by better-than-expected top line and lower-than-anticipated cruise costs.

Carnival's large-scale operations allow it to exploit global growth opportunities faster. The company's expansion in the emerging markets of Asia Pacific region - like China and Australia which are gaining popularity as a tourist destination - is also encouraging. The Asia Pacific region is an attractive bet for Carnival because of the stable economy and the growing affluent middle class.

Carnival Corporation recently announced that it has inked a contract with Meyer Werft to build four cruise ships with the largest capacity in the world. The contract is part of the previously announced strategic memo of understanding with leading shipbuilders Meyer Werft and Fincantieri S.p.A for nine new ship orders between 2019 and 2022, announced in Mar 2015.

The four environment-friendly ships will be powered by Liquefied Natural Gas (LNG), the world's cleanest burning fossil fuel. Among these, two will be manufactured for AIDA Cruises at Meyer Werft's shipyard in Papenburg, Germany, and the other two at its shipyard in Turku, Finland.

All of these ships will have a total capacity of 6,600 passengers, feature more than 5,000 lower berths, and incorporate an extensive number of guest-friendly features. A major part of the vessel's design will make more efficient use of the space and create a superior onboard experience.

With the addition of these ships, Carnival is expected to cut operating costs, as older and less-energy efficient ships are replaced with more streamlined vessels. Further, these ships will increase Carnival's fleet capacity.

CCL's price took huge hits following the Costa Concordia disaster in Italy in 2012, fire onboard the Carnival Triumph in 2013, and sporadic disease outbreaks aboard its vessels over the last decade. However, CEO David Arnold has revitalized the brand and this image recovery is not fully reflected in the company's stock price, even though it saw net revenue yields increase in Q1 2015, reversing nearly 10 quarters of declines. Carnival also asserted its dominance in the industry by shelling out $9 million for a well-done sixty second ad during the 2015 Super Bowl.

Carnival is likely to see plenty of free cash in the coming decade because its fleet is mature and capacity growth is slow and it consistently operates at full capacity. This bodes well for CCL's dividend yield - currently moderate at 2.10% and looking like it has room to grow into the 3.5% range given the logic explained here.

Like everything else in China, Chinese demand for cruises is projected to increase exponentially over the next decade. It is predicted that cruise vacationers in China could increase to 8 million by 2020, up tenfold from a current figure of fewer than 1 million. CCL currently has four vessels in China with plans for a fifth in 2016. Carnival projects 2.5 million passenger cruise days in China for 2015 and 4.0 million in 2016. Carnival is well positioned for China's growth because its maturity and cash on hand will allow it flexibility in expansion in the region.

Analysts Opinions

Susquehanna boosted their price target on shares of Carnival Corp from $55.00 to $56.00 in a research note issued last Friday. The firm currently has a “positive” rating on the stock. Susquehanna’s price target points to a potential upside of 15.18% from the stocks previous close.

Also, Zacks upgraded shares of Carnival Corp from a hold rating to a buy rating in a research note issued to investors last Monday. The firm currently has $53.00 price target on the stock.

According to Zacks,

“ Carnival Corp. has beaten the Zacks Consensus Estimate in the past few quarters on higher revenue yields. Going forward, brand-building efforts and other promotional activities are expected to continue to keep the bookings trend strong. Also, the company’s strategy to tap the high growth Asian market requires special mention. However, higher marketing spend remains a major threat to margin expansion. Moreover, the anticipated increase in net cruise costs in 2015, due to technology designed to improve fuel efficiency, would keep profits under pressure.”

Carnival Corp has also been given a “BBB” credit rating by analysts at Morningstar. The firm’s “BBB” rating suggests that the company is a moderate default risk. They also gave their stock a three star rating.

The company has also been the subject of a number of other research reports:-

• Analysts at KeyBanc initiated coverage on shares of Carnival Corp in a research note on Monday, May 18th. They set an equal weight rating on the stock.

• Analysts at SunTrust upgraded shares of Carnival Corp from a neutral rating to a buy rating and set a $53.00 price target on the stock in a research note on Wednesday, May 13th.

• Analysts at Tigress Financial upgraded shares of Carnival Corp from an underperform rating to a neutral rating in a research note on Wednesday, April 29th.

• Finally, analysts at Wells Fargo & Co. upgraded shares of Carnival Corp from a market perform rating to an outperform rating in a research note on Tuesday, April 7th.

One equities research analyst has rated the stock with a sell rating, ten have assigned a hold rating and ten have assigned a buy rating to the company. The stock presently has a consensus rating of Hold and a consensus target price of $50.42.

Conclusion

Carnival's CEO has not only turned around the company's image, he has restructured its plans balancing market share and pricing power. This past winter, CCL reportedly experienced strong "wave seasons" - the period when customers typically book spring and summer cruises. Notably, they have stopped offering steep price discounts near the end of the wave season as they had historically done; instead, they are pursuing what they call "price integrity" - keep prices constant or rising irrespective to demand and supply of tickets.

Analysts expect 30% earnings growth next year, so there is a lot of upside potential for the stock, even at the current level.

Therefore, based on the facts above the following option trade is recommended…..


**OPTION TRADE: Buy the CCL Oct 2015 50.000 call (CCL151016C00050000) at or under $1.90. Place a protective stop loss at $0.75, and a pre-determined sell at $3.50.



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