Shares of Carnival (CCL) have soared by 35% year-to-date and it’s not hard to see why. A potent combination of the economy reopening, a vaccinated populace and pent-up demand for cruises, have fueled the optimistic rally.
That said, Deutsche Bank analyst Chris Woronka warns that an over-exuberant outlook might come back to bite the bulls.
That’s not to say Woronka has a bearish outlook. In fact, the analyst has made some readjustments to his CCL model to factor in the upbeat mood and “incorporate more bullish assumptions about the trajectory of the recovery.”
The problem, says Woronka, is that any upside is already “priced in,” and going by his calculations, the analyst says it is difficult to see an “upside case.”
“Putting it all together, if we assume that CCL’s EBITDA in 2023 is $1.0 billion higher than it was in 2019 (revenues +5%, margins +150bps) and further assume that the stock can trade at 15x 2023E P/E and 8.8x 2023 EV/EBITDA, before any discounting, we still only arrive at a valuation of $28,” Woronka said. ”As we’ve noted in the past, the combination of rising multiples on rising expectations, which is what we are continuing to see reflected in the stock (perhaps to an intensifying degree), is likely to present challenges to the bull narrative as the resumption of cruising in key markets actually commences in coming months.”
Woronka’s assessment follows Carnival’s Q1 business update. In January, the company guided for average monthly cash burn rate of roughly $600 million in the quarter, but Carnival said the figure came in lower – at $500 million. However, due to “higher restart expenses and timing on certain cap-ex/principal payments,” the cash burn rate is anticipated to once again hit $600 million in fiscal 2Q (May quarter).
So, what does it all mean for investors? While Woronka raises his price target from $16 to $25, the figure still suggests downside of ~15% from current levels. Woronka’s rating stays a Hold. (To watch Woronka’s track record, click here)
The analyst community is evenly split when considering the cruise operator’s trajectory; based on 4 Buys, Holds and Sells, each, the stock qualifies with a Hold consensus rating. Woronka’s price outlook is roughly in-line with his colleagues’; going by the $24.39 average price target, the shares are anticipated to be changing hands for a 16% discount a year from now. (See Carnival stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.