Carnival earningsThe U.S. economy, while gradually improving, is still struggling in many areas. The steep collapse in commodity prices has taken down the energy and materials sector, while the strong U.S. dollar and fears of slowing growth in the emerging markets are weighing on technology and health care.

One industry that is bucking the broader trend, however, is tourism. Consumers are enjoying lower prices at the pump and modest inflation. As the labor markets continue to sport strong job growth, this means consumers have more disposable income to spend  ̶  and they are spending this extra cash on experiences like travel.

Carnival Corp. (NYSE: CCL) is a major beneficiary of this trend. The stock is up 36% in the past two years, while the S&P 500 is up just 9% in that time. Carnival shares rose another 5% on Wednesday when the company released better-than-expected fiscal first-quarter earnings.

Carnival Earnings Swell on Lower Fuel Costs

Last quarter, Carnival earned $142 million in profit on $3.65 billion of revenue. On a per-share basis, earnings soared to $0.18, a tripling from the same quarter last year. Revenue grew 3% for the period, thanks to 4% growth in passengers during the quarter.

Earnings, as adjusted for non-recurring items, were $0.39 per share, which was well ahead of the $0.31 per share expected by analysts.

Much more so than revenue growth, the biggest reason for Carnival’s massive earnings growth last quarter was a huge decline in costs. Specifically, Carnival spent much less on fuel, which is one of the biggest components of its cost structure.

Carnival spent $187 million on fuel for its 24 cruise ships last quarter, which was a 41% decline from the same quarter last year, in which it spent $318 million on fuel.

Looking ahead, Carnival has a catalyst for continued growth, which is the improvement of relations between the U.S. and Cuba.

In fact, last week Carnival became the first U.S. cruise operator in more than five decades to receive approval from Cuba, to begin cruise trips there. Carnival will be launching its first cruises to Cuba in May, initially with itineraries including Havana and other major Cuban cities.

Another important factor from Carnival’s earnings report that is helping to ease investor fears:  Carnival has not seen a slowdown in demand due to the heightened level of geopolitical risk in recent weeks.

Carnival said that advance bookings for the remainder of the year are actually ahead of the prior year, with higher prices as well. That indicates the company is not suffering from recent events including the Zika virus outbreak and the terror attack in Brussels.

It’s a great sign that Carnival does not have to resort to discounting to keep passengers. And, it’s clear that higher prices mean the company enjoys a certain degree of pricing power. When combined with the massive fuel savings it’s enjoying, Carnival’s impressive margin expansion should fuel significant earnings growth in the future.

Strong Guidance for Revenue Growth

Going forward, Carnival could continue to reward shareholders with compelling returns. Analysts expect earnings to reach $3.36 per share this year on average.

The company itself set guidance for 3% revenue growth for the full year. Earnings are projected at $3.20 to $3.40 per share.

If Carnival meets these targets, investors will likely do well with the stock. Carnival shares trade for 22 times earnings, a reasonable multiple that is essentially on-par with the broader market. The stock trades for 15 times forward earnings.

And, the stock offers an above-average 2.4% dividend yield.

As a result, because of its modest valuation, attractive dividend and future growth catalysts, it could be smooth sailing ahead for Carnival.

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Published by Wyatt Investment Research at