UBS expects Costa to drive Carnival Q3 upside though Caribbean remains challenging

UBS expects Carnival to turn in a profit of $1.44 per share, a penny below the consensus and at the high end of the company's guidance of $1.38 to $1.44. Year-ago EPS was $1.38.

UBS estimates about a penny per share of positive impact from fuel, excluding impact from zero premium collar hedges. The brokerage's Q3 constant currency net yield estimate of up 40 basis points compares to Wall Street's flattish estimates and the company's guidance of flat to down 1%. UBS noted Carnival's Caribbean prices could be up, but yields down due to lower occupancy.

Q3 is driven by high season itineraries in Europe and Alaska, where Carnival had 44% and 14% of capacity respectively. That compares to 27% in the Caribbean, a sizable amount, and UBS analyst Robin Farley said close-in Caribbean bookings were likely challenging.

'We believe 2014 will be a year of reinvestment for the Carnival brand after the [2013] Triumph incident and view Costa's recovery as a positive read-through for Carnival brand recovery,' Farley told investors. 'With supply expected to remain below historical average growth in North America and Europe, we believe the industry overall is seeing improving yield fundamentals.'

The brokerage said implied guidance for Q4 is for yield up 2% to 2.5%, which would be the first positive quarter of yield for CCL since Q1 2012. Farley expects the cruise giant to reiterate its full-year yield guidance of $1.60 to $1.75, while she estimates 2014 EPS at $1.79 versus the consensus of $1.74.

UBS rates Carnival 'buy' with a 12-month price target of $40, based on 14 to 16 times its 2015 EPS estimate of $2.45. Shares closed Friday at $40.72.