Carnival's (CCL -0.04%) business made a massive recovery last year, and its stock gained 130%. But so far in 2024, it's down 18%. So is the cruise line giant's recovery story over, or is this an opportunity to buy it on the dip?
Carnival is back in business
Carnival stock was risky during the period of the pandemic when the company wasn't producing any revenue, and investors who took a chance on the stock while it was in the doldrums were well rewarded when it rebounded last year. Carnival is still benefiting from pent-up demand for cruises and limited industry capacity. It entered 2024 in its best-ever booked position, and it looks like that's going to continue in the near term.
Last week, it reported that it had surpassed guidance across the board in its fiscal 2024 first quarter (which ended Feb. 29), with record Q1 revenue of $5.4 billion and adjusted earnings before interest, taxes, deprecation, and amortization (EBITDA) of $871 million, up from $382 million in the prior-year period. Customer deposits reached an all-time high of $7 billion.
Operating income and cash from operations are both firmly back in positive territory, and with continued discipline, efficiency, and revenue growth, it should book higher net profits and repay its debt faster.
CCL Operating Income (Quarterly) data by YCharts.
The Q1 earnings beat led to management raising guidance for fiscal 2024. It's now expecting adjusted EBITDA of $1.05 billion for the second quarter and $5.63 billion for the full year -- a 30% increase over 2023.
Why is Carnival stock down this year?
The recovery that investors were betting on has already happened, and the extra demand that built up when cruising was on hiatus is going to eventually dry up. When it does, Carnival is likely to experience a pullback before demand levels normalize. It's unclear when that will happen. In the meantime, even though revenue is still increasing, the growth rates won't be as high as they were.
Carnival is still contending with other issues, including profitability. Demand and revenue are exceeding pre-pandemic levels, but Carnival is still posting net losses, save for one quarter last year. Before the pandemic, Carnival was reliably profitable.
The other is debt, and it's a biggie. Carnival has cut its debt burden from its peak of about $35 billion, but it still has about $30 billion left to pay off. It will take several years for the company to get back to its pre-pandemic debt level.
The company has taken several positive actions toward reducing this debt. It has prepaid almost $6 billion between last year and the first quarter, shaving off some of its highest-interest debt and opening up a wider path toward positive cash flow. However, Carnival doesn't have a lot of leeway to absorb any new setbacks. For example, the bridge collapse in Baltimore compelled it to reroute a ship as well as change some itineraries. In the immediate aftermath, management forecast that the accident would have up to a $10 million impact on the company's earnings this year.
Is Carnival's story over?
Carnival's current position says a few things about its business and potential. It's the leading global cruise operator, and while demand for cruises will moderate soon, it should remain strong at normal levels. It's not surprising that the stock is pulling back right now. The company itself is still in flux.
This stock is quite cheap, trading at a price-to-sales ratio of less than 0.9. That looks undervalued in the context of its future opportunities.
There are risks with owning Carnival stock right now, but they are mitigated by the many positives. Carnival is well-positioned to keep growing and return to being a market-beating stock.
