Buy Carnival Stock. Choppy Market Conditions Will Pass.
Shares of the cruise operator have dropped since it reported earnings last month. It looks like a dip worth buying.
Carnival has hit some rough waters, but its recent postearnings selloff looks like a great opportunity to book a cruise on its stock at a discount.
At first blush, Carnival’s fiscal first-quarter earnings report on March 27 should have been reason for celebration on the Lido deck. The company reported a loss of 14 cents a share, better than its own guidance for a 22-cent loss and the 18-cent loss that analysts were expecting. In addition, Carnival said it saw record bookings during the quarter, with significantly higher pricing.
It wasn’t all good news, though. Revenue climbed 22% year over year to an all-time high of $5.41 billion, just a hair short of the $5.42 billion consensus. But Carnival also said it would earn 98 cents this fiscal year, five cents higher than its previous guidance and what would be its first profitable year since before the pandemic—only to fall two cents short of analyst forecasts. The stock fell 4.3% during the week ended on March 29.
Several issues probably held shares back. First, the company said that the collapse of Baltimore’s Francis Scott Key Bridge would make as much as a $10 million dent in profit, and given how recent the tragedy was, that hasn’t been incorporated into Carnival’s guidance. Then there’s the fact that the shares had run up some 11% in the month before earnings, about three times the broader market’s rise, which left little room for surprises.
With the stock now down 17% on the year, at $15.34, Carnival stock looks worth buying. Carnival is successfully “navigating unexpected headwinds [and] delivered yet another strong quarter,” says Macquarie analyst Paul Golding, who raised his price target by $2, to $24, following the results, citing ongoing demand that provides greater visibility into the company’s path to profitability.
Carnival has long been the laggard among the three major cruise operators, which include Royal Caribbean Group and Norwegian Cruise Line Holdings. That could be due to high-profile past incidents like the Costa Concordia disaster in 2012, its slightly less-well-heeled passengers, slower growth in ticket prices, or a higher debt level—total debt stood at some $30 billion at the end of fiscal 2023, high even by cruise company standards.
Carnival is working hard to put these issues behind it. The company generated adjusted free cash flow of $1.4 billion in its most recent quarter, and redeemed and retired nearly $1 billion of debt with original maturities in 2027. That includes its remaining second-lien debt, which tends to carry higher interest rates, outstanding. It’s well on the path toward an investment-grade rating.
“Over the next few years, Carnival should generate several billion dollars of free cash flow that will be used to repay debt,” says Chris Kissane, credit analyst at Newfleet Asset Management, whose firm owns Carnival bonds. “They want to get back to investment-grade ratings, and they should have the ability to do that, absent a recession.”
Carnival still has work to do, but it also has been making improvements that are helping it to close the gap with competitors. In the first quarter, Carnival’s net “yields”—a measure of passenger spending after stripping out currency changes—were up 17% from the year-ago period, higher than Norwegian’s growth, while occupancy rose 11 percentage points, ahead of Royal Caribbean.
“The demand environment remains robust, and balance sheet restoration is happening in real time,” notes Melius Research analyst Conor Cunningham.
Carnival should also continue to have pricing power. In normal times, investors would start to worry about new cruise ships hitting the water and adding to capacity. The vessels, though, take years to build, and Carnival placed its first order since the pandemic only in February. That means it will continue to operate the nearly 100 ships already on the seas until roughly 2027. Other cruise lines have also held off, which means growth will be limited.
“With cruise lines, you have visibility out about a year or so, so we know the demand is there for the full year of 2024,” says Kissane. “And in 2025 and 2026, we’ll likely have a window where capacity growth across the industry is muted relative to normal.”
Carnival will have to continue to deal with issues around the globe. It previously announced that the conflict in the Red Sea would shave seven to eight cents a share off the full year’s earnings, while the Baltimore bridge collapse—with a $10 million price tag—looks less onerous, at probably a penny a share.
Trading around 13.8 times forward earnings, Carnival is even with Royal Caribbean but cheaper than Norwegian, at 15.4 times. That seems reasonable, given that it’s expected to go from breaking even in 2023 to earning roughly a dollar a share 2024, and by growing earnings per share 42% in fiscal 2025, faster than its two largest competitors.
Tigress Financial Partners’ Director of Research Ivan Feinseth recently boosted his price target on Carnival by $2 to $25, arguing that “the recent pullback in the shares [is] a major buying opportunity.”
You can take that to the bank. Or the beach.