Cruise ship operator Carnival (CCL 0.43%) (CUK 0.63%) keeps sailing from one storm into another. While most people want to put the pandemic behind them, the cruise line must still contend with the uneven reopening of the travel industry around the world and the ongoing war in Ukraine.

While Carnival took on a lot of debt to survive the industry shut down, the cruise operator does have a lot of cash on hand as a result, and revenue per passenger cruise day (RPCD) is now above 2019 levels. But because of the potential for a recession next year, the hoped-for calmer waters are still looking pretty choppy.

Woman standing at the deck rail of cruise ship.

Image source: Getty Images.

A world that refuses to cooperate

Carnival's stock is still under pressure from COVID, which decimated the industry and forced Carnival to suspend operations for over a year. Its lingering impact continues to weigh on its finances, and CEO Josh Weinstein told analysts some of its most important markets are still lagging. Japan is about two years behind North America in reopening for travel, while Australia is about a year behind. And, of course, China has yet to reopen at all.

The war in Ukraine is not helping either, because many of Carnival's passengers for a number of top European destinations, or some 2 million people, come from Asia, Australia, and the Baltics. Some 40% of Carnival's Costa cruise line guests come from those markets, and 25% of Princess line guests hail from them.  That's going to play a role in Carnival's overall performance in the first half of 2023.

Creating a financial strain

As of the end of Carnival's just-completed fiscal year, Carnival had total long-term debt of $32 billion, up from $28.5 billion last year. While it hasn't filed it's annual report just yet, at the end of the third quarter Carnival had some $16 billion due by the end of 2026. This is a significant burden, especially considering the cruise line's compressed ability to generate revenue.

Occupancy stands at about 81% of 2019 levels, up 10 percentage points from the prior quarter, and Carnival says it expects to be at 90% in the first quarter of 2023.

It did end the year with $8.6 billion in liquidity available, so investors don't need to worry about bankruptcy for the largest cruise line, but a recession next year could blow it back off course.

Carnival's Princess cruise line.

Image source: Carnival.

A better business coming through

Despite these challenges, there are some reasons for optimism at Carnival. It is at 99% of its fleet capacity compared to 2019, and its constant dollar RPCD was 4% higher in the fourth quarter and 2% above the record pre-pandemic levels for the full year. This comes despite the credits it's had to give passengers in the past for canceled cruises due to COVID.

Carnival is also maintaining tight control over expenditures, reducing investment spending by $1.7 billion for 2023 and beyond. The company has implemented a number of cost-cutting measures to preserve cash, including adding new, more fuel-efficient ships while retiring older, less efficient ones.

It has just four ships on order through 2025 and doesn't expect any new ships in 2026, and anticipates just one or two new builds each year for several years thereafter. Weinstein says this is Carnival's lowest order book in decades. 

All aboard!

On the one hand, Carnival stock is a risky investment due to its high debt levels, uncertain geopolitical unrest, and the risk of a recession. On the other, the company's strong brand recognition and cost-cutting efforts, coupled with its pricing power and the pent-up demand consumers are currently exhibiting, should help it navigate these latest squalls.

Still, management sees 2023 as a "transition year" and thinks the benefits of its fleet optimization program won't be felt until 2024, suggesting investors may not see any material improvement in the cruise ship operator's stock performance for some time.

Yet because Carnival is sound enough to survive and will be sailing the Seven Seas for years to come, its current deeply depressed stock price is a fine place to climb aboard, even if you don't catch the exact bottom.