I am neutral on Carnival Corporation (CCL) as it looks attractively priced relative to normalized business levels and analysts expect the business to rebound sharply in 2023. However, enough uncertainty and risk lingers that a greater margin of safety may be necessary to warrant adding shares.
Carnival Corporation is one of the world’s leading travel companies specializing in leisure. It helps tourists easily travel around the world with over 100 vessels distributed across 10 cruise line brands.
The company had humble origins in 1972 when founder Ted Arison started with a single secondhand ship, and barely enough fuel to make a one-way trip.
Today, CCL maintains a healthy portfolio of well-renowned brands such as Princess Cruises, Holland America Line, P&O Cruises, and AIDA Cruises.
Thanks to its sizable presence around the world, CCL is arguably the largest cruise company in the world. It plans on growing further and adding 16 new ships by 2025.
Strengths
It is true that the global pandemic disrupted operations for Carnival Corporation, but the recent progress in vaccination and successful treatments have allowed CCL to return to normal operations.
While the company is still in bad shape with growing debt and increasing uncertainty, the long-term return on investment is undeniable.
In any case, Carnival Corporation continues to be the global leader in cruise travel and shares an optimistic outlook for 2022 and beyond. There are few brands directly competing with CCL and most of them have been forced to close up shop due to increasing disruptions by the pandemic.
Recent Results
The company reported an adjusted net loss of $2 billion during Q4 2021, which is comparable to the previous quarter.
CCL ended the quarter with a liquidity of $9.4 billion (an increase of $1.6 billion from Q3 2021) and announced that it had enough liquidity to return to normal operations. Total customer deposits have increased by $1.2 billion from the prior year.
Valuation Metrics
At first glance, CCL stock looks richly valued here as it trades above its historical valuation multiple averages on an enterprise value/EBITDA ratio and price-to-normalized earnings per share basis.
Its EV/EBITDA ratio is 18.5 compared to its historical average of 5.7, and its price-to-normalized earnings per share ratio is negative compared to its historical average of 5.2.
However, the business has been temporarily hampered by COVID-19 headwinds, and the company is expected to bounce back pretty quickly in the coming years.
In 2023, for example, analysts expect EBITDA to grow by 133.3% and normalized earnings per share to come in at $1.84.
This would put the current EV/EBITDA at 4.3 and the current price-to-normalized earnings ratio at 12.3 based on 2023 numbers. Based on those numbers, the stock looks slightly discounted.
Wall Street’s Take
According to Wall Street analysts, CCL earns a Hold analyst consensus based on one Buy ratings, six Hold ratings, and zero Sell ratings in the past three months. Additionally, the average CCL price target of $25.83 puts the upside potential at 13.6%.
Summary and Conclusions
CCL stock is currently suffering from lingering headwinds from COVID-19. However, with cases dropping off rapidly and general expectations of the pandemic subsiding, CCL should see business rebound sharply over the next few years. In fact, based on analyst forecasts, the stock looks very reasonably priced relative to expectations for 2023.
That said, Wall Street analysts are overall only neutral on the stock here and the company faces economic and uncertainty risks as a recession or additional variants of COVID-19 emerging could extend the recovery timeline for the business.
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