Carnival Corp.'s cheap cruises are great for vacationers but bad news for long-suffering shareholders who are waiting for the company to recover from a string of problems on its ships.
Carnival shares sank almost 8 per cent on Tuesday after the world's largest cruise operator said its profit fell 30 per cent in the third quarter and that bookings so far for the next nine months are lower than in previous years.
The company has been discounting cruise packages to try to lure more consumers on board its ships, a move that is eating into its profits.
Analysts say Carnival is a solid company with strong growth potential given the appeal of cruises to aging populations, as well as economic recoveries in key markets such as the United States and Europe.
However, the company is struggling to rebuild its brand appeal after a string of mishaps. The engine of its Triumph ship caught fire in February, leaving passengers adrift for days as toilets overflowed. The following month, its Dream ship had to cut a trip short because of an engine problem and days later its Legend vessel had to skip a final port of call after its propulsion system failed.
"The disappointment today was that the recovery potential for the Carnival brand is just not seeming to be happening," said Edward Jones analyst Robin Diedrich, who has a "hold" rating on the stock. "The future outlook for bookings, price wise and volume trends, is below expectations."
The company, which operates the Carnival, Holland America and Costa cruise lines, also owns the Costa Concordia, which capsized in January 2012, killing 32 people. The company said Tuesday that it could take a couple of more years for that brand to recover.
Carnival shares closed down $2.86 (U.S.) to $34.54 on the New York Stock Exchange on Tuesday, nearing its 52-week low of $32.06 reached in early July. The stock's highest point was just above $57 in 2005.
Even before Tuesday's share-price drop, Carnival stock had only increased 1 per cent over the past year, which compares to about a 30-per-cent increase for rivals Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd.
Of 16 analysts surveyed by First Call, five had a "buy" rating on Carnival, while 11 had a "hold" recommendation.
Some investors may be tempted to stick around for Carnival's 2.7-per-cent dividend yield, which is above Royal Caribbean's 1.5-per-cent payout and that of industry peers, such as Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc.
But Tuesday's results throw a spotlight on the company's near-term problems. Carnival reported net income of $934-million or $1.20 a share, for the quarter ended Aug. 31, down from $1.33-billion or $1.71 a share, a year earlier. Revenue rose slightly to $4.72-billion.
Net revenue yields, a key indicator that combines ticket sales and money spent onboard the ships, fell 3.8 per cent. While that was in line with expectations, analysts are more concerned about the company's forecast that net revenue yields will fall 3 to 4 per cent in the fourth quarter compared to a year earlier.
"Though the third quarter offered smooth sailing for the business, delivering net revenue yields and cost that were in line with management's previous guidance, the forward outlook left us disappointed," Morningstar analyst Jaime Katz said in a note on Tuesday.
She worries that continued discounts for travellers on cruise packages will make it difficult for the company to improve margins.
"[We] believe the critical third quarter of 2014 could still be in jeopardy if the negative contribution from the Carnival brand continues to weigh on the total business."
With files from Reuters