Take a look at a Carnival (CCL +2.58%) (CUK +2.77%) stock chart, and it's bound to make you seasick. Shares of the world's leading cruise line operator have been lingering in the single digits for nearly two weeks, fetching half of what Carnival was trading at just a year ago.
It doesn't seem fair. The company is fundamentally in a better place than it was when its stock was coasting in the double digits. The cruising industry is back on track. Analysts see record revenue in 2023, followed by a profitability surge next year. There are naturally concerns with how a highly leveraged business will navigate the icy waters of rising interest rates and economic challenges. Things are a little choppy out there. However, you have to like Carnival stock at this point. Let's get into why the shares may not stay below $10 for long.
NYSE: CCL
Key Data Points
Making waves
Despite the depressed share price, Carnival did something positive recently that it hasn't done in more than a year. Revenue nearly tripled in its latest quarter, but the adjusted loss of $0.85 per share was better than the $0.87-per-share deficit that analysts were modeling. It's the first time since early in the pandemic that Carnival didn't fall short of Wall Street's bottom-line expectations.
| Period | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q3 2021 | ($1.25) | ($1.55) | (24%) |
| Q4 2021 | ($1.27) | ($1.52) | (20%) |
| Q1 2022 | ($1.26) | ($1.66) | (32%) |
| Q2 2022 | ($1.17) | ($1.64) | (40%) |
| Q3 2022 | ($0.13) | ($0.58) | (287%) |
| Q4 2022 | ($0.87) | ($0.85) | 2% |
Data source: Yahoo! Finance. EPS = earnings per share
This isn't the only unfortunate streak that will end soon. No one likes red ink, and Carnival hasn't posted a quarterly profit since fiscal Q4 2019. Analysts see the cruising giant announcing a healthy quarterly profit this summer. It would end the miserable run of 14 consecutive quarterly losses.
The positive catalysts don't end there. Wall Street pros are forecasting revenue to soar 73% this year, topping $21 billion. It will be a new record for Carnival, surpassing the $20.8 billion it reported in fiscal 2019 before the pandemic would tear the industry apart.
Image source: Getty Images.
The news isn't as kind on the bottom line. Carnival and its smaller rivals had to do a lot of panhandling to make it through the dry years. They diluted investors by issuing more stock. They took on more debt, increasing their interest expenses. This peak summertime quarter might not be enough to push Carnival back into the black this year. Some analysts see a small profit in fiscal 2023, but others are bracing for a modest loss. However, every Wall Street pro covering the stock sees a healthy profit next year.
The consensus estimate calls for Carnival checking in with adjusted earnings of $0.92 a share next year. Shares are trading for 10 times that multiple, and that may not seem like a bargain given its bloated balance sheet and the economic sensitivity that cruise line stocks face. However, the forecasts get even rosier after that.
- Fiscal 2025 EPS: $1.21
- Fiscal 2026 EPS: $2.42
- Fiscal 2027 EPS: $2.90
Going out four years to arrive at a future multiple of 3 times earnings may seem like an epic sea journey, but keep in mind that things could fare even better along the way. The recovery outlook is being made through the current lens of high interest rates and pandemic concerns. The rebound may happen faster, and that will help Carnival pay down its debt and repurchase shares to boost its investing profile sooner rather than later.
You won't have to wait long to get fresh news out of Carnival. It reports first-quarter results early next week. The key metrics themselves won't be special beyond another triple-digit jump on the top line and a narrowing deficit on the other end of the income statement. The real meat to Monday morning's results will be what the company has to say about booking trends heading into the telltale summer travel season and beyond. If the news is encouraging, it's a fair bet that the stock will disembark from the port of its current single-digit price point to far kinder waters.
