Cruise line operator Carnival (CCL 1.13%) came out of the gates hot in 2023, smoking the market with a 45% year-to-date share price gain. It's the type of breakout investors have been waiting for after Wall Street had little worth celebrating in 2022.
But some caution might be prudent here. A few remaining red flags indicate that Carnival stock's recent momentum could be short-lived.
The pandemic divergence
COVID-19 was a disaster for the tourism industry, and it put companies like Carnival in a tough spot. The cruise industry was shuttered overnight, drying up Carnival's revenue and income, and leaving it with huge losses. (Even unoccupied by passengers, ships are expensive to maintain.) Understandably, the stock was hammered. You can see the massive declines in share price and enterprise value below.
But its enterprise value -- its market cap plus net debt -- has diverged from its share price over the past couple of years. Carnival had to raise a lot of money to survive during the pandemic. Its solution was to sell more stock and take on more debt. As the chart below shows, outstanding shares and total debt increased substantially.
CCL Shares Outstanding data by YCharts.
Carnival's total debt has nearly tripled since 2020, while the number of shares outstanding almost doubled. All of this inflated the company's enterprise value, even if the share price itself is still well below where it traded before COVID-19.
Carnival's valuation is already tough to justify
After the stock's remarkable run in January 2023, Carnival's enterprise value is now more than 11% higher than it was before the pandemic, even though its share price remains down by more than 70% from where it traded ahead of the early pandemic crash.
Remember that Carnival's business isn't back to full speed at this point. Its revenue over the past four quarters was more than 40% below where it was before COVID-19, and its free cash flow is billions in the negative over the past year. However, things have begun moving in the right direction as tourists return to the seas. Analysts' estimates call for Carnival to be near the break-even point on earnings per share this year and on profitability in 2024.
CCL Revenue (TTM) data by YCharts.
That's great news. However, the company still has a massive debt load and a bloated share count. It seems likely that these factors will limit further share price growth. Even if you believe in Carnival's long-term prospects, it could be prudent to wait for a pullback on shares before buying in, or avoid the stock altogether until the company can begin paying down debt and buying back shares. And if you are a shareholder who has enjoyed this recent run-up, now could be an excellent opportunity to lock in some profits.
