The last few years have been absolutely brutal for Carnival Corporation (CCL 3.54%). The coronavirus pandemic shuttered the cruise line business, and ever since the company has struggled to return to pre-pandemic occupancy.
Thankfully, it seems 2023 could be the year that the industry takes a turn for the better. Investors now appear bullish about the company's future, sending its share price up nearly 32% since the start of the year. Carnival's latest earnings also indicate that occupancy levels will match or exceed pre-pandemic levels by mid-year.
With all the optimism surrounding Carnival, should you really invest in the stock right now? Or is it best to steer clear?
What's going on with Carnival today?
2022 was a big year for Carnival. Its cruise capacity, meaning the number of ships available for service, reached 97% by year's end. The company brought back 100,000 staff members to serve the 9 million guests it welcomed on its cruise ships this last year, and occupancy levels went from 50 percentage points below pre-pandemic levels to just 19 percentage points below at year's end.
Revenue per passenger cruise day (PCD) has already passed pre-pandemic levels in the fourth quarter of 2022, meaning the company is earning more per passenger than it did in 2019. But it's still operating at a net loss.
Margins for loss are improving each quarter. Its net loss per share shrank by 39% since last year, and improved by 60% from 2020. Carnival's outlook for revenue and occupancy levels for the remainder of 2023 remains positive as demand for its cruises and travel remains elevated. With that said, Carnival isn't in the clear just yet. The company still has some massive hurdles to overcome before it returns to profitability.
Rough waters ahead
To stay afloat in the years following the pandemic, the company took out a lot of loans. Operations may be returning to more normalized levels, but the company has a lot more debt on its books -- just under $32 billion, to be exact. And macroeconomic challenges like high inflation, higher fuel prices, rising interest rates, and foreign currency rate fluctuations are impacting its profitability.
It has $4 billion of cash on hand including its credit facilities which should be enough to pay its $2.4 billion loan that's payable in 2023. But that's a pretty thin operating margin. If macroeconomic and geopolitical conditions worsen the company could be left with a hefty bill at the end of the year.
The company is making some considerable cost-saving measures, and is holding back from delivering new ships. At the end of 2022, it had one luxury expedition ship to be delivered in 2023 and four remaining ships on order to be delivered by 2025 -- which is the lowest book level in the company's history.
Is Carnival a buy?
I do like the direction Carnival is headed, but it has a long way to go before it's in the clear. Because of its high levels of debt, the cruise ship operator will need to put most, if not all, of its earnings toward the repayment of its debt obligations -- which will take years. Even though the company is down 69% over the last three years and down 84% over the last five. I personally feel investors' money is better spent on other growth stocks with less debt and risk.
