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Wells Fargo sees upside for Carnival's Q3 but hurricanes, Korea key to future

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On the eve of Carnival Corp. & plc reporting third quarter financial results, Wells Fargo said the company's core overall business remains strong and, together with foreign exchange benefits, Q3 upside is likely.

However, a key issue will be if there's any residual impact on first half 2018 bookings from recent hurricanes. 'We believe investors will collectively look through an estimated 5-cent to 7-cent impact' on second half 2017 earnings per share from hurricanes Irma and Maria, Wells Fargo analyst Tim Conder said in a note.

Another factor could be the impact on demand for Asia cruises in light of North Korean geopolitical tensions.

Carnival and the industry's strongly booked mid-year 2017 position—90% for Q3, 70% for Q4—and less second half seasonal exposure should result in minimal fourth quarter cancellations, Conder said. But there's investor uncertainty about the degree of impact that eastern Caribbean hurricane damage will have on the first half of 2018.

The first two quarters are the most exposed to Caribbean capacity.

Conder said the magnitude of any material hurricane impact will depend on the industry’s effectiveness in communicating which ports are open and being subsituted for those that sustained damage, cruising's benefit to the eastern Caribbean economies' recovery and no material impact to the Bahamas, southern or western Caribbean itineraries.

Higher fuel prices since Carnival's last earnings report, the brokerage added, should be muted by lower derivative losses and appreciation in the Australian dollar, euro, British pound and Canadian dollar relative to the US dollar.

According to Wells Fargo, Hurricane Irma caused 81 cruise itinerary cancellations or alterations, and impacted 25 cruise ports. Hurricane Maria hit several of the same destinations along with Puerto Rico, the Dominican Republic and the Turks and Caicos Islands. Key West had its first ship call Sunday, and several modestly damaged ports could reopen by the end of November.

However, severely damaged destinations like Dominica, the British and US Virgin Islands, St. Maarten/St. Martin and Grand Turk could take six months to reopen, the brokerage said.

Early 2017 restrictions on travel from China to South Korea reversed yield growth. Wells Fargo said that prior to restrictions, industry yields were tracking up while absorbing 30% to 35% capacity growth.

Information on any additional pricing impact given the rising North Korean tensions will be 'the critical factor to the near-term multiple investors are willing afford to CCL and the industry shares,' Conder summed up. Should regional tensions normalize, Asia could provide upside for 2018 against a backdrop of reduced China capacity.

Wells Fargo rates CCL 'outperform' (buy) with a $77 price target. Shares closed at $64.33, down 12 cents, on Friday.