Carnival’s seasonally small fourth-quarter results were better than anticipated, but a still-weak global consumer is keeping pricing power tepid for the company. The cautious spender continues to compress pricing by waiting it out for better deals, causing cruise companies to have more erratic control of pricing, with bookings occurring closer in to sail dates.

The main risks to the industry now are two fold: first, that Europe remains in an economic predicament that has lasted more than two years and, second, that the fiscal cliff weighs heavily on the domestic consumer if the American politicians cannot resolve their differences imminently.

During the fourth quarter, Carnival delivered declining net revenue yields of 5.6%, better than the 7%-8% decline the company had forecast and the 7.5% lower metric we had modeled. Yields were helped by better than expected pricing on close in bookings, strength in Asian markets, and resilient onboard spending.  Net cruise costs fell 1.4% thanks to better than expected fuel prices and more efficient fuel usage, as Carnival continues to pull on all levers to maintain or improve its cost structure.

The company’s outlook for 2013 was not as positive as neither we nor the Street anticipated. After a very difficult 2012 due to the Costa Concordia accident, a weaker European consumer, and a still-recovering domestic market, it seemed most investors (including us) had anticipated that 2013 would produce a whipsaw effect on yields in the latter three quarters of 2013, boosting full-year yields.

Management, however, guided to current dollar net revenue yields in 2013 of between 1.5% and 2.5%, slightly lower than the 2.8% we had modeled. The company expects net cruise costs to rise between 1.5% and 2.5% as well, much higher than the flat rise in costs during the year that we had predicted. Carnival expects that its metrics should generate earnings per share of between $2.20 and $2.40 in the upcoming year, lower than the $2.45 we anticipated.

Additionally, management offered a sensitivity analysis on full-year earnings per share, which indicated that a 10% change in fuel prices would have an impact on 2013 earnings per share by $0.30, while a 10% change in relevant currencies relative to the U.S. dollar would change 2013 earnings per share by $0.20.

Despite a weaker forecast than we would have liked for 2013, we applaud Carnival’s ability to continue to produce significant free cash flow and remain prudent allocators of capital. For investors interested in stellar stewardship, we believe Carnival remains top-notch.

In 2012, the company generated $1.2 billion in free cash flow, all of which has been returned to shareholders through its $0.25 per share regular quarterly dividend, a special dividend of $0.50 and share repurchases (3.5 million shares). In the year ahead, management expects all of its free cash flow will be returned to shareholders again, which in total would equal $3.5 billion over the 2011 through 2013 period.


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