Stock Analysis & Ideas

Carnival Corporation Stock (NYSE:CCL): Bright Future Overshadowed by Debt Burden

Story Highlights

Carnival Corporation’s profitability is trending in the right direction, but investors continue to focus on the company’s massive debt pile. A liquidity crunch is highly unlikely in the foreseeable future, and the company seems well-positioned to grow.

Carnival Corporation (NYSE:CCL), the largest cruise operator in the world, was forced to take on a massive debt pile in 2020 to survive the virus-induced recession, and this debt pile is now overshadowing the bright future that awaits the company in the long run.

The company, however, will have to survive short-term headwinds before making the most of the long-term growth opportunities available in the global leisure industry. Nonetheless, I am bullish on the prospects for Carnival Corporation as I believe it will successfully navigate the rough seas.

Profitability Trending in the Right Direction

For the first quarter of Fiscal 2023, Carnival reported a loss of 55 cents per share, slightly better than the Wall Street consensus. The company also reported revenue of $4.4 billion, a staggering 166% year-over-year increase aided by the strong pent-up travel demand.

Although inflationary pressures have dampened the outlook for many consumer discretionary companies, Carnival continues to benefit from the stellar demand for travel stemming from travelers who had been confined indoors for more than two years because of mobility restrictions.

In the last quarter, Carnival reported the highest quarterly booking volumes in its history, which is a testament to the continued demand for cruises. There are many positive signs from a financial performance perspective, although Carnival is still loss-making (on a net income basis).

For instance, operating cash flows turned positive in the last quarter, which marks the first cash flow positive quarter since the beginning of the pandemic. Adjusted EBITDA came in at $382 million, well ahead of the $250-$350 million projected by the company in the previous quarter. These numbers suggest Carnival is making steady progress toward profitability.

Favorable Macroeconomic Developments

There is no slowdown in travel demand, which is the biggest tailwind behind Carnival today. There are many reasons to believe that this demand trend will continue into the future.

First, the flexible work options offered by many companies around the world today have led to increased travel as professionals are now traveling while still working. Before the pandemic, it was mandatory to take time off work to explore new destinations, which is no longer the case.

According to Zippia data, 26% of U.S. employees are working remotely today compared to just 5.7% in 2018. When part-time remote workers are included in the equation, 66% of U.S. employees have the option to work from anywhere today, at least on a part-time basis.

Second, cruise companies are increasingly offering personalized experiences, which has piqued the interest of high-net-worth individuals. Over the last two years, the cruise industry was forced to rethink its business strategy and lure new customers by offering deep discounts. Today, the focus has shifted to offering unique experiences, which is likely to drive the demand sustainably higher in the long run.

Third, the rising middle-income society in populous Asian countries such as India and Malaysia will expand the target market for the cruise industry. Recognizing this opportunity, many cruise companies are now offering itineraries focused on this new customer cohort.

Risks to Monitor

According to Oxford Economics, the operating capacity of the cruise industry will exceed 2019 levels by more than 16% in 2024, with new vessels being delivered, and this expanding capacity will push ticket prices lower. If the demand does not keep up with the increasing supply, Carnival’s operating margins will come under pressure.

A deep global recession will also be a threat to the cruise industry as consumers may finally decide to shore up cash without spending on travel.

Investors will also have to keep a close eye on rising costs. Elevated energy prices continue to exert pressure on operating margins while the company is still forced to spend money to comply with health precautions. Carnival will be impacted by currency headwinds as well since the company generates a meaningful share of its revenue internationally.

Is CCL Stock a Buy, According to Analysts?

Wall Street has not been oblivious to the progress Carnival has made in recent quarters. After digesting the recent earnings, Wells Fargo (NYSE:WFC) analyst Daniel Politzer upgraded Carnival stock to an equal weight rating, citing the improving balance sheet of the company.

Carnival does not have any major near-term debt maturities, and the company does not need to raise fresh capital in the foreseeable future, according to the analyst. Ever since the dawn of the pandemic, Carnival has been faced with liquidity issues, but this is no longer the case.

Last January, when Carnival stock was trading close to its current prices, Citi analyst James Hardiman wrote that Carnival is appealing as a compelling long-term investment given that the momentum for the cruise industry outweighs macroeconomic headwinds.

Overall, CCL comes in as a Moderate Buy based on the ratings of 11 Wall Street analysts. The average CCL stock price target is $12.17, which implies upside of 19.7% from the current market price.

Takeaway: Carnival is an Attractive Bet

The risk/reward profile of investing in Carnival is attractive, especially for long-term-oriented investors. I believe the massive debt pile of the company is overshadowing the improving fundamentals, which presents investors with a good opportunity to double down.


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