Carnival (CCL +0.45%)(CUK +0.70%) reported on its first quarter of fiscal 2023, showing better-than-expected results amid a frenzy of booking activity. In fact, it was the cruise company's best-ever quarter for booking volumes in its history.
Based on recent performance and its outlook, let's determine if this cruise line stock is a buy.
Better-than-expected earnings
Carnival delivered $4.4 billion in revenue in the first fiscal quarter, which represents 95% of revenue levels in the first quarter of 2019. Year over year, the figure marks an impressive 173% improvement over 2022.
Occupancy during the quarter was 91%, better than the company guidance provided last December and a 37 percentage points year-over-year improvement. What's interesting is that this occupancy improvement by 37 percentage points versus the year-ago quarter was because of higher capacity. With capacity now 4.5% above 2019 levels, CEO Josh Weinstein said during the first-quarter earnings call that he expects Carnival to reach "historical occupancies" by this summer.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) finished the quarter at $382 million, also outperforming company guidance. According to chief financial officer David Bernstein, higher ticket prices, better net per-diems, and increasing occupancy all contributed to the better-than-expected performance.
While ultimately Carnival took a net loss of $693 million for the first quarter under generally accepted accounting principles (GAAP), the result was actually another beat for the company. Late last year, it had guided for a loss of $750 million to $850 million during the period. And it also looks much better than 2022's first-quarter loss of $1.89 billion.
Inflation and debt still loom large
Inflation has certainly played a role in Carnival's higher revenue and earnings, and management has taken this into account with pricing initiatives for 2023. Weinstein said, "We are working hard to mitigate four years of inflation while still reinvesting in advertising and sales support to build future demand."
Working to offset inflation, Weinstein and team anticipate raising prices over the course of the year. Carnival expects full-year 2023 net per-diems to be up 3% to 4% from 2019 levels.
The Miami-based cruise operator also endured a $31 million impact from unfavorable currency exchange rates and higher fuel prices in the first quarter.
And while Carnival's long-term debt is more than three times what it was in 2019, Bernstein said during the earnings call that "we are beyond the peak of our total debt." Having peaked at over $35 billion in the first quarter, Carnival's debt is expected to be reduced to $33.5 billion by year-end.
Bernstein also expects adjusted free cash flow to increase next year, along with revenue growth and gross margin improvement, to "drive down our debt balances on our path back to investment grade."
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Key Data Points
A record booking season with no signs of slowing
Starting last year with Black Friday and Cyber Monday booking surges, Carnival enjoyed a record-breaking booking season during the first quarter. In fact, the company's North American segment broke booking records every single week in January and February.
And booking strength has continued into March, according to Weinstein, bolstering revenue expectations for the rest of the year. As he said during the earnings call, "Booking volumes for our North American brands have been running in excess of record 2019 levels for the last six months, and booking lead times are now back to peak levels."
For the second quarter, Carnival anticipates a positive adjusted EBITDA of $600 million to $700 million, which would mark a substantial 57% to 83% sequential improvement over the first quarter.
Why I think Carnival is a buy
With no signs that demand is slowing down, and the company making definitive progress toward profitability, I think it's only a matter of time before Carnival's stock reflects the recovery.
To ensure this remains a sound investment, investors should pay close attention to Carnival's long-term debt shrinking over time, and look for steady gross-margin improvement in future quarters.
