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Carnival May Finally Be on the Path to Profitability

By Rich Duprey – Dec 27, 2021 at 4:57AM

Key Points

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The cruise operator has all its ducks in a row despite missing Wall Street's estimates.

The cruise line industry is charting a course for a comeback next year, and Carnival (CCL 0.11%) (CUK) is going to be one of those steaming to the forefront. The ship operator reported fiscal fourth-quarter results that missed Wall Street's top- and bottom-line estimates, but the market still gave its stock a celebratory send-off because it suggested that cruise lines are going to make it out of the crisis intact.

Not even the omicron variant of COVID-19 seems to have knocked Carnival off course. Many are beginning to suspect this more pernicious but less deadly variant is the way we finally move beyond the pandemic, which is good news for this cruise line and the industry as a whole.

Parent and child pointing off the deck of a ship.

Image source: Getty Images.

Limping into port

Carnival is sailing with only half its oars in the water. It relaunched 22 ships during the fourth quarter. By New Year, it will have two-thirds of its ship capacity in service. The company's whole fleet is expected to be back in operation by the spring of 2022. 

It was able to carry 850,000 passengers during the fourth-quarter period, or two-and-a-half times more than it did in the third quarter. That indicates that what the industry has been saying is true: There is significant latent demand for voyages, and that hunger will keep growing as time progresses. Bookings for future itineraries in 2022 and 2023 are running hot, rivaling the rate Carnival saw in 2019 before the pandemic struck. That was a record year for the travel and tourism industry, and future reservation numbers show that a combination of widespread vaccinations, stringent, on-board safety protocols, and strong pricing can bring Carnival and the other cruise lines through to the other side.

Riding out the storm

Carnival reported revenue of $1.29 billion, which missed the $1.34 billion Wall Street was anticipating. But to put that in perspective, revenue per passenger cruise day was actually 4% greater than in the fourth quarter of 2019. Getting the fleet back to full strength will enable it to begin posting comparable revenue growth soon enough.

It's going to need it, of course, because it still reported some staggering losses for the period. Carnival said it had GAAP net losses of $2.6 billion, or $2.31 per share, with adjusted losses of $2 billion. While its debt load remains substantial, having taken on billions of dollars worth of debt to survive the crisis, it's entering 2022 with $9.4 billion in liquidity available.

Importantly, Carnival refinanced much of its debt, which will save it $400 million annually in interest payments, and also means it has no financing needs for the coming year. Its monthly cash burn of $510 million, while significant, is less than what it planned for, driven in part by lower capital expenditures.

That means Carnival is probably sitting in its best financial position since the pandemic began, and the company has a tailwind behind it that should see 2022 and 2023 return it to strength.

Photo of the Carnival's P&O Cruises vessel, Pacific Jewel.

Image source: Carnival.

A bigger, better, stronger fleet on the horizon

Carnival also has the benefit of having a new, more efficient fleet coming online, which should save it additional money. It expects 50% of its capacity to consist of these new, larger, more efficient ships upon returning to full capacity. They will help expedite Carnival's return to profitability and improve its return on invested capital because the new ships will get a better price point, a better mix of cabins, and other premiums that will benefit the ticket price Carnival realizes over time. 

Last quarter was a historical high in terms of bookings compared to 2019, though that wasn't the case in the fourth quarter. CFO David Bernstein explained that while it sounds beneficial to be at record levels, it actually means the cruise line is leaving money on the table -- so to take advantage of the demand it was seeing, Carnival was able to raise prices, which helped push it back down the supply-and-demand curve. 

That's Carnival operating from a position of relative strength, which bodes well for the future.

Time to lift anchor

Of course, there are a lot of wild cards when it comes to the cruise industry. More deadly variants and new lockdowns could always upset the comeback, but cruise lines are currently riding a wave of well-earned hope that they will recover.

Both the delta and omicron variants caused small spikes in cruise cancellations, but nothing that deters Carnival's recovery. With shares down 13% in 2021, this cruise operator could be a good investment once more.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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