If you assumed that the rebound of Carnival’s stock (NYSE: CCL) was over, you might want to think again; the recovery is just getting started. Despite an impressive 90% surge from its lows in 2020, the stock is still 77% shy of its pre-pandemic peak, which was not inflated but represented a strong industry leader with solid performances, abundant opportunities, and a reliable dividend.
Let’s take a closer look at Carnival’s current standing and possible trajectory for the next year.
Sales Growth
Carnival’s sales are currently at an all-time high and continue to show a positive trend. The surge in demand is remarkable, and some analysts worry it could eventually stabilize, but there are no signs of this happening yet. In fact, revenue for the fiscal second quarter (ending May 31) soared to a remarkable $5.8 billion.
Consumers are eager to embark on cruise vacations, and Carnival’s momentum positions it well for the remainder of the year, with high occupancy rates and ticket prices. The company has bookings stretching well into 2025 at elevated rates. To capitalize on this demand, management has made adjustments to its fleet for better efficiency.
Looking ahead, while there may be a deceleration in demand next year as it aligns with pre-pandemic levels, Carnival could still gain from declining inflation and potential interest rate cuts expected soon, further boosting consumer interest.
Profitability Progress
Before the pandemic, Carnival was a highly profitable entity, and it is on a pathway toward recovery. The company has achieved positive net income under Generally Accepted Accounting Principles (GAAP) twice in the past year, including a robust second-quarter profit of $92 million, which marks a $500 million improvement over the previous year.
Additionally, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $1.2 billion in the second quarter, up significantly from last year’s figures of $681 million. Management forecasts a staggering 40% rise in adjusted EBITDA over the full year.
Even their net losses are nearing zero, indicating that Carnival is inching closer to consistent profitability. Analysts anticipate earnings per share (EPS) of $1.19 in 2024, jumping to $1.55 in 2025.
Debt Management
One of Carnival’s significant challenges remains its substantial debt load. While managing some debt is typical for established, dividend-yielding companies, Carnival incurred a massive amount during the pandemic to remain operational, which places pressure on cash availability.
However, the likelihood of another global event that could jeopardize Carnival seems low at present, allowing the company to stabilize. Yet, concerns about slowing demand persist. Should revenue growth stall, then Carnival’s ability to meet debt obligations could become problematic.
Currently, Carnival is actively paying down debt while ensuring operations are sustainable. The company ended the latest quarter with $4.6 billion in liquidity, having repaid another $1.6 billion and strategically managing its debt for improved standing. With operational cash flow reaching $2 billion in the second quarter and adjusted free cash flow at $1.3 billion, the outlook for next year will depend on ongoing updates regarding debt repayment and liquidity management.
Attractive Valuation Opportunities
Currently, Carnival stock is undervalued, primarily due to its high debt levels. The stock has a price-to-sales ratio of 0.9 and a forward price-to-earnings (P/E) ratio of just 10.
As Carnival enhances its profitability and reduces its debt, this bargain pricing won’t persist indefinitely. For investors with a risk tolerance, Carnival stock presents an opportunity that could yield long-term rewards.
Investing Considerations
Before diving in and investing $1,000 in Carnival Corporation, it’s worth considering what some experts are recommending. While Carnival is getting attention, it wasn’t listed among the top stock picks from the Motley Fool’s analysis team, which highlights ten stocks poised for strong returns.
In conclusion, while Carnival still faces challenges, there’s considerable potential for recovery and growth. With rising sales, an improving profit picture, and a focus on debt reduction, Carnival could provide great opportunities for forward-looking investors.