Carnival Cruise Lines: Buy, Sell, or Hold?

It won't be long before Carnival Corp. (CCL -0.66%) shares are making waves again. The world's leading cruise line operator reports its fiscal second-quarter results on Monday morning. The stock will be on the move next week.

Carnival has been rallying lately. The shares have nearly doubled this year, up 96% in 2023. Momentum has returned in favor of the cruise lines, accolades long overdue after the prolonged shutdown of leisure fleets since the onset of the COVID-19 crisis. Is now a good time to buy Carnival stock? Is it a better time to take profits? Let's take a closer look at the thought process of buying, selling, or just holding Carnival at this point. 

A shore thing

Carnival's numbers next week should be impressive. Analysts see revenue nearly doubling to $4.8 billion, admittedly comped against weak financials with Carnival's fleet running far from full strength in the springtime of last year. Those same Wall Street pros are modeling a loss of $0.34 a share, nearly 80% lower than the deficit it posted a year earlier. 

Folks are craving -- and perhaps more importantly, trusting -- a cruising vacation again. Carnival posted record booking volumes for all future sailings during its fiscal first quarter three months ago. There have been no macro developments to make anyone believe that sentiment hasn't gotten even more bullish now. 

Image source: Getty Images.

It's not just potential passengers hopping back on board. Wall Street is also walking up the gangway. Barclays raised its price target on the shares from $13 to $18 on Wednesday, expecting a strong report out of Carnival. The stock's already had a big run this year, but pricing checks at Barclays show that the cruise industry is starting to close the pricing gap with land-based getaways. It's boosting its guidance for the second half of the year. It's encouraging to see a major analyst firm get even more bullish days before a telltale financial update. 

The red ink isn't ideal. Monday's projected loss would make it 14 quarters in a row without a profit. However, even the trend there is bullish. After largely falling short of expectations since the pandemic, Carnival has come through with back-to-back reports of better-than-expected results on the bottom line.   

 Data source: Yahoo! Finance. EPS = earnings per share.

These are all good reasons to be a buyer of Carnival stock heading into next week's report. Now let's turn our attention to the possible reasons to be a seller. There's been a lot of dilution since the pandemic forced the industry into taking out more debt and issuing more stock to stay afloat. A bull can look at the stock chart and see that Carnival is trading 78% below its all-time high in early 2018, but it doesn't mean that the company's perceived value is 78% less than it was more than five years ago.

Carnival's share count has risen roughly 75% since the COVID-19 crisis rocked the travel market. Its debt load has more than tripled. The end result is that Carnival's current enterprise value of $50.7 billion isn't far from its 2018 peak.

Cruise line stocks have been resilient in the recovery, but the industry has also been exposed. Anything that rocks the boat globally -- geopolitical tensions, a worldwide failure to contain inflationary and recessionary pressures, and obviously another pandemic -- can crush Carnival and its peers again. 

Thankfully the positive catalysts outweigh the negative ones right now. What if Carnival actually breaks through and posts a quarterly profit next week? All of the analysts following Carnival already expect it to turn a profit for the seasonally potent fiscal third quarter, but an earlier-than-expected leap into the black would make the bullish narrative even stronger. The stock may not be historically cheap based on its enterprise value, but momentum is favoring those long the stock ahead of Monday's very important report.