Carnival's (Cunard's owners) Cruisin' Despite Fuel Costs

This on forbes.com:

Despite skyrocketing fuel prices, Carnival (nyse: ccl - news - people ) was still able to eke out a 3% rise in second quarter earnings, keeping investors happy and inching shares up.
Shares of the world’s largest cruise vacation group edged up 30 cents, or 0.6%, to $49.96 on Tuesday following the release of the second quarter earnings report.

Net income for the quarter ending May 31, 2007 rose to $390 million, or 48 cents a share, from $380 million or 46 cents a share for the corresponding period a year earlier. Revenues increased to $2.9 billion from $2.7 billion in the second quarter of 2006.

Steven Wieczynski, an analyst at Stifel Nicolaus & Company, said the company’s second quarter results beat his estimate by a penny. “Really what hurt the quarter and what will hurt the second half of the year is fuel prices,” said Wieczynski. “They are really starting to take off at this point.”

Analysts polled by Thomson Financial forecasted a profit of 47 cents a share on sales of $2.9 billion.

Fuel increased 7% to $333 a metric ton from the previous guidance of $310 a metric ton, although it was down from the $354 a metric ton of the second quarter of 2006. Higher fuel costs impacted earnings by approximately 2 cents a share and reduced earnings estimates for the full year by 12 cents a share. Wieczynski said that because Carnival doesn’t hedge its fuel it is subject to large swings in fuel prices, whereas Royal Caribbean (nyse: rcl - news - people ), which hedges its fuel, is not.

Even so, shares of Royal Caribbean were down 9 cents, or 0.2%, to $41.40 in afternoon trading on Tuesday.

Micky Arison, Carnival chief executive, said that the company’s Caribbean cruises still had a relatively high percentage of capacity, although price pressure was an issue. “However, increases in revenue yields from our European brands together with the strengthening Euro and Sterling produced significant revenue yield growth outside of North America,” Arison said. He added that the strength of the company’s European brand has offset weaknesses in North America.

Wieczynski said he doesn’t know if weakness in the Caribbean is because less would-be customers are taking cruises or because they have already and want something else. Also, macro factors, such as a weakening economy and a deteriorating housing market, have left consumers with less disposable income. “What Carnival and Royal Caribbean are trying to do is get the first time cruiser involved which is tough because if you haven’t taken a cruise you might be skeptical,” Wieczynski said. “People are worried about hurricanes or mishaps with people falling over board. It seems like we’ve had a lot of negative press over the last year.”

On June 18, Cunard Line, which belongs to Carnival, announced the sale of Queen Elizabeth 2 (See Queen Elizabeth 2 Sales To A New Home). The ship is expected to be delivered to its new owners in Dubai in November 2008. Wieczynski said the sale of the ship has no effect on Tuesday’s share price.

Wieczynski has a “buy” rating on the stock with a price target of $58