Global Demand Holds Up for Undervalued Carnival

Narrow-moat

We don't plan any material change to our $58 fair value estimate and view shares as undervalued at current levels, trading in four-star territory. We plan to tick our 2016 estimate up modestly from $3.31, as performance in the third quarter tracked slightly better than our internal cadence implied, thanks to better than expected as-reported yields (which increased 0.4% versus our prior expectation for slightly negative yields). Carnival raised its earnings per share guidance by $0.05 at the midpoint, to $3.33-$3.37, helped by better yield performance and incremental share repurchases. In our model, this upside is offset by lower capacity growth in 2017 than the 3.9% we originally modeled (at 2.5% now), as drydock days rise from 380 in 2016 to 470 in 2017. Furthermore, all else equal, foreign exchange and fuel are expected to provide a $0.28 headwind year over year in 2017.

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