Carnival (CCL -2.36%) (CUK -2.24%) had a difficult time during the earlier stages of the pandemic. The world's biggest cruise ship operator anchored its ships -- and it shifted from a profit to a loss. At the same time, the stock plummeted. And investors wondered when, if ever, the cruising giant would recover.
Fast-forward to today. Carnival has seen a rebound in demand, it's making its way back to profitability, and the shares are soaring. So far this year, Carnival stock has climbed more than 50%. Now investors might be asking themselves a new question: Considering the gains, is it too late to get in on the Carnival story? Let's find out.
The debt problem
As I mentioned above, early pandemic days weighed heavily on Carnival. Not only did the health crisis wipe out profit, it also lifted debt. To maintain its ships and hang on through the period of halted operations, Carnival had to increase its borrowings. So, while profit shifted to a loss, debt soared.
CCL Total Long Term Debt (Annual) data by YCharts
Debt continues to be Carnival's biggest problem. Carnival can't pay this down overnight, so it's an issue that will persist even as Carnival's earnings recover. Meanwhile, the higher interest rate environment could increase the company's variable rate borrowings. So, debt clearly represents an ongoing headwind.
But here's the good news: Carnival is seeing progress that could result in a return to profit and a path to paying down debt. In the most recent earnings period, Carnival recorded its highest quarterly booking volumes ever. It topped records in North America, Europe, and Australia. This is a big sign that demand for cruising has returned worldwide. And total customer deposits reached a first quarter record.
The company said these trends are continuing. At the same time, a couple of other factors directly support the idea of paying down debt.
Carnival's cash from operations turned positive in the first quarter. The company expects cash from operations to keep increasing -- and plans to use this cash to pay its debt. Separately, Carnival's chief executive officer Josh Weinstein told Yahoo Finance last month that today it has only about four ships on order -- the lowest number in decades. This means less capital spending and more cash available for debt payments.
The path to profitability
Carnival's path to profitability looks brighter too. The company still is reporting a net loss, but smaller losses than expected. In the quarter, GAAP net loss totaled $693 million. That's compared to expectations for a loss of at least $750 million. Adjusted EBITDA of $382 million also beat expectations.
Now, let's get back to our question: Is it too late to buy Carnival stock? Today, the shares trade for less than 1 times sales, around a record low. Yes, the stock has climbed quite a bit this year -- but that's after a significant drop from early 2020 levels. I don't expect Carnival to return to its 2020 level overnight. And after the big gain in the first half of this year, the stock may not immediately surge in the second half.
But, if Carnival continues to make progress toward profitability and progressively addresses debt, share price increases surely aren't over. Demand for cruising is high, and Carnival leads the industry. So, if it can manage its expenses -- as it's doing now, for example, by not ordering too many new ships -- the company's earnings can recover and grow over time.
Meanwhile, if you buy the shares now with the idea of holding for the long term, you're likely getting in for a good price. I still wouldn't recommend Carnival to cautious investors right now. For that, we'll need to see more progress on lowering debt levels. But, if you have some appetite for risk, it's not too late to buy this popular travel stock.
