Major indexes have slipped into bear territory. And many leaders in their industries have fallen, too. Carnival (NYSE: CCL) (NYSE: CUK), the world's biggest cruise operator, is an example. But Carnival's poor performance isn't only recent. The stock actually has been on the decline for a good part of the year -- and now has lost 61% year to date.
Considering this extreme drop, it may be tempting to pick up a few Carnival shares. But do they really represent good value at this point? Let's take a closer look and find out.
Falling earnings, rising debt
Carnival had it rough during the early days of the pandemic. The company's cruising operations screeched to a halt. And while revenue and profit plummeted, long-term debt soared.
CCL Revenue (Annual) data by YCharts
The good news is Carnival's ships resumed sailing last summer. And Carnival's earnings and demand for its cruises have been improving. In the fiscal third quarter, revenue climbed 80% from the previous quarter.
Importantly, Carnival hit a key milestone. The company reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of more than $300 million. This is the first time Carnival has reported a positive adjusted EBITDA figure since it resumed sailing.
There's also no doubt about travelers' desire to set sail once again. Occupancy reached almost 90% for the company's August cruises. And booking volumes for future sailings are higher than pre-pandemic levels. Carnival even expects occupancy to reach historical levels as of next year.
Today, Carnival faces costs such as those related to the restart of certain cruise ships and those related to health and safety protocols. Inflation and supply chain problems also are weighing on Carnival. But these are temporary issues and shouldn't hurt Carnival over the long term.
What's most concerning right now is Carnival's debt level. The company's long-term debt totals more than $28 billion. That's much higher than Carnival's cash and equivalents of $7 billion. It's also important to keep in mind that rising interest rates could make Carnival's variable-rate borrowings more expensive.
A look at valuation
Now, let's take a look at Carnival's valuation. Right now, the stock is trading at 0.9 times sales. In pre-pandemic days, Carnival stock traded at two to three times sales.
The big question is can Carnival get back to its pre-pandemic financial health -- and valuation? Eventually, it's possible. Demand for Carnival's cruises is there. And the company is making efforts that should equal more revenue.
For example, since 2019, it's replaced smaller, less efficient ships with nine larger, more efficient ones. These ships will result in a 6% decrease in unit costs linked to ship operations. And they offer a stronger mix of revenue opportunities that Carnival says should translate into more profit.
But, considering Carnival's high level of debt and the current economic environment, progress will take time. Maybe even a very long time.
So, is Carnival a buy? Investors with an appetite for risk and a long-term view should consider adding a few shares of Carnival to their portfolios today. The stock is a bargain -- if it can reach its goals for occupancy and profit in the coming years. And if it can keep growing well into the future.
But the more cautious investor may want to wait and watch on the sidelines, at least until Carnival pays down some of its debt and reports more progress in revenue and profit. It's not yet smooth sailing for Carnival. But the company is heading in the right direction.
