Wachovia analyst says Carnival results augur well for cruise industry

By Ronda Fears

Nashville, Tenn., March 25 - Carnival Corp.'s better-than-expected results last week augurs well for continued improvement in cruising, said Wachovia convertible analyst Sri Nadesan in a report Monday. The Carnival credit could come under pressure if its rival bid for Princess P&O is successful, but the analyst sees comforting trends in the industry for the most part.

Carnival reported fiscal first-quarter earnings per share of 22c, versus the consensus of 16c.

"This performance was expected with the better-than-anticipated improvement in travel, in general, and leisure travel, in particular, but it indicates how strongly the cruise market has recovered," Nadesan said in the report.

"Remember, Carnival's first quarter ended Feb. 28, meaning this figure includes December, which was still a weak month."

It appears from Carnival's first-quarter results, the analyst said, that yields may be recovering more quickly than Royal Caribbean has indicated.

Royal Caribbean on March 14 provided guidance for yield declines of 7%-8% for the second and third quarters of 2002, respectively. That appeared to be too conservative at the time, Nadesan said, and may be even more so in light of Carnival's expectations.

"Carnival said in its earnings call that it expects yield declines of 4%-6% in the second and third quarters, respectively, and that the fourth quarter should see year-over-year yields slightly higher," Nadesan said in the report.

"Given the speed with which passengers are returning to cruising, it appears even Carnival's guidance might prove conservative."

Carnival said in its press release that recent booking levels have been running well ahead of last year. Although occupancy has recovered to 102.8% for the first quarter, it is still below the 105.2% level of the year-earlier quarter.

For fiscal 2001, ended Nov. 30, Carnival had debt of $3 billion and EBITDA of $1.26 billion. Carnival's leverage ratio was 2.4 times, compared with 1.8 times for fiscal 2000.

If the merger with Princess P&O - for which Carnival is rivaling Royal Caribbean's bid - were to be completed, fiscal 2001 leverage on a pro forma basis would likely rise to 2.8 times, the analyst said.

Although fiscal 2002 EBITDA will likely be higher than fiscal 2001, Nadesan added that he believes Carnival's credit could come under pressure if the deal with Princess is completed.

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