This High-Yielder Just Went On Sale...

Nathan Slaughter's picture

Wednesday, October 2, 2019 - 2:30pm

by Nathan Slaughter

You've probably noticed a recent uptick in local gasoline prices. I paid $2.29 per gallon this morning, versus $1.99 a few weeks ago. The blame can be pinned squarely on a spike in crude oil following a surprise attack on a Saudi Arabian oil production facility.

In case you missed it, here is the short version…

On September 14, a salvo of cruise missiles rained down on state-owned Saudi Aramco's Abqaiq facility, crippling infrastructure that handles 5.7 million barrels per day. Government officials were quick to blame Iran for the strike. Secretary of State Mike Pompeo went so far as to declare the unprovoked attack an overt "act of war," and the President ordered tightened economic sanctions.

About 5% of the world's entire oil supply passes through this facility, making this one of the biggest supply disruptions on record. Worse than Hurricane Katrina, the Invasion of Kuwait, the Libyan Civil War, and other such events.

The surgical strike was designed to inflict heavy damage to key equipment in at least 17 different spots. It remains to be seen how much capacity stays offline and for how long. Benchmark Brent crude prices shot up about 20% in the aftermath, but have since moderated somewhat as repairs are proceeding swiftly.

A Rare Chance To Buy This Stock On The Dip
This geopolitically charged climate might put a floor under the oil market for a while. While that benefits many stocks in the energy sector, it could weigh on others – including Carnival Cruise Lines (NYSE: CCL)

Carnival burns about 800,000 metric tons of fuel each quarter. And higher prices now look to be a headwind over the next few months. Management has just tweaked its 2019 guidance and is now expecting a mid-range profit of $4.25 per share, versus a prior forecast of $4.30.

It's a mild revision (a nickel per share) caused by events outside of the company's control. But investors jumped ship, sending CCL shares down more than 8% on the following session (Thursday). Shares are off by about 18% since news of the attack.

CCL chart

The soft outlook overshadowed what was a better-than-expected third-quarter report. Carnival collected $4.5 billion in ticket revenues and took in another $1.8 billion in onboard revenues, pushing the total to $6.5 billion. That's about $700 million (12%) more than the same period last year.

Earnings for the quarter rose 11% to $2.63 per share, easily topping Wall Street's target of $2.53. In other words, the company actually beat estimates by a dime, yet investors panicked because it might give back a nickel next quarter.

That's not to make light of current issues. Aside from fuel, foreign exchange also remains a drag on earnings. The busy hurricane season has led to several canceled and altered itineraries. And the federal government's recent ban on travel to Cuba has had a negative impact.

But these are all transitory concerns and don't diminish the company's long-term cash-flow generation.

Carnival's fleet continues to expand. The company boarded 3.75 million guests last quarter, an increase of nearly 200,000. And those additional guests are spending freely on drinks, gambling, and shore excursions -- onboard revenue growth has been running in the 35% to 40% range this year.

There certainly aren't many empty cabins. In fact, occupancy ticked up to 113% last quarter (indicating more than the standard two people per room on average). And advance bookings for the first half of 2020 are trending ahead of the same period in 2019.

Action to Take 
While fuel costs should be monitored, I believe the market is overreacting. Even after the recent increase, Carnival is expecting to pay $462 per metric ton next quarter -- compared with $531 per ton at this time last year. So fuel prices are still considerably cheaper than they were twelve months ago.

Looking ahead, fleet capacity is expected to grow by another 7% next year, which translates into more than 6,000 additional available lower berth days (ALBDs). That will drive cash flows forward, even if per-capita revenue yields per passenger remain flattish.

We boarded a bit early with this stock over at Daily Paycheck, but I think the stock will eventually revisit former highs above $60. In the meantime, investors can collect a nice 4.7% yield while they wait.

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Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.