Ever since the pandemic broke out, Carnival (CCL 0.61%) has been one of the top battleground stocks on the market.
The world's biggest cruise line got hit arguably harder than any other stock as cruises were shut down for the better part of the year, and subsequent COVID-19 variants delayed recovery in the industry.
However, the pandemic finally seems to be in the rearview mirror now. The U.S. declared an end to the health emergency last month, and even China has lifted its "zero COVID" policy. That's good news for Carnival, and the stock recently touched a 52-week high in response to strong demand and the normalization of the business.
In fact, one Wall Street analyst thinks the stock could rally another 38%. Stifel analyst Steven Wieczynski reaffirmed a buy rating and a price target of $18 after its most recent earnings report, saying that its bookings and pricing trends were strong, the company is bringing in record customer-deposit levels, and management said that it would not dilute shareholders anymore.
Wiecyznski also called the setup for the stock "overly compelling."
With the stock already up 62% this year, can Carnival tack on more gains? Let's take a look at what would have to happen.
Image source: Getty Images.
What the numbers say
Carnival is down significantly from pre-pandemic levels, which is the crux of the bull case for the stock. At the start of 2020, the stock was trading around $50, or roughly 300% higher than where it is today, and bulls believe that the company can continue to move toward pre-pandemic levels.
However, financially speaking, the current Carnival is much different from the pre-pandemic one. In order to survive the pandemic, the company had to raise massive amounts of cash through debt and equity. Its long-term debt exploded from less than $12 billion to more than $35 billion. Consequently, its trailing-interest expense has jumped by roughly 10 times to $1.65 billion. Shares outstanding, meanwhile, have nearly doubled to 1.26 billion.
That puts the company at a significant disadvantage as it tries to recover to pre-Covid levels. With that much dilution, Carnival would have to essentially double its net income in order to match pre-pandemic earnings levels and then earn an additional $1.65 billion in profit to service the additional interest expense.
The road to recovery
The company's first-quarter results show the recovery progressing and rising to record levels, according to some metrics.
Revenue was $4.4 billion, equal to 95% of 2019 levels, while customer deposits set a Q1 record at $5.7 billion, 16% above 2019 levels.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) topped guidance at $382 million, up from a loss of $962 million in the quarter a year ago, but the company is still losing money on a generally accepted accounting principles (GAAP) basis with a loss of $693 million, or $0.55 a share.
The company is guiding to $3.9 billion to $4.1 billion in adjusted EBITDA for the year, though with its large debt burden and interest payments, EBITDA is not a particularly meaningful metric for Carnival. Whether Carnival can continue to recover will depend on the health of the global economy as travel is historically sensitive to recessions and other macroeconomic challenges.
The good news is with the stock price still down, it shouldn't take much for Carnival to keep moving higher, and demand for travel has been strong since the pandemic faded.
However, with occupancy already set to top 100% (which includes extra passengers like children), Carnival will likely have to rely on price increases to drive further profit increases.
That will make another 38% gain harder than it might seem, looking at the stock's pre-pandemic comparisons.
Carnival is still in a deep hole, and it's going to take time for it to get out.
