Carnival Corp. (CCL 2.30%) and Altria (MO 1.26%) were both once considered stable blue chip plays for conservative investors. Carnival is one of the world's largest cruise line operators, while Altria is the top tobacco company in the United States.
But over the past five years, Carnival's stock declined nearly 70% as Altria's stock slumped 20%. Altria still squeezed out a total return of 16% after factoring in its reinvested dividends, but Carnival suspended its dividends more than three years ago. Should investors buy either of these out-of-favor blue chip stocks as a turnaround play?
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Carnival's cruising again... with a lot more debt
Carnival grew at a steady rate in the years leading up to the pandemic. Between fiscal 2014 and fiscal 2019 (which ended in November 2019), its revenue rose at a compound annual growth rate (CAGR) of 6%.
However, Carnival's revenue plunged 73% to $5.9 billion in fiscal 2020 and dropped 66% to $1.9 billion in fiscal 2021 -- marking its two worst years in recent history -- as global travel stalled during the pandemic. It still achieved occupancy of 101% in fiscal 2020 by filling up the vessels it hadn't idled, but that key ratio dropped to 56% in 2021.
NYSE: CCL
Key Data Points
That abrupt slowdown caused Carnival to turn unprofitable in fiscal 2020 with a staggering net loss of $10.2 billion. The company slightly narrowed its net loss to $9.5 billion in fiscal 2021, but it had to take on more debt to stay in business. As a result, its long-term debt more than doubled from $9.7 billion to $28.5 billion from fiscal 2019 and fiscal 2021.
Yet Carnival survived that harrowing ordeal and started to grow again after pandemic restrictions eased. In fiscal 2022, its revenue soared 538% to $12.2 billion, its occupancy percentage climbed to 75%, and it narrowed its net loss to $6.1 billion. But the company's long-term debt still increased 12% to $32 billion -- which gave it a painfully high debt-to-equity ratio of 4.5.
Analysts expect Carnival's revenue to rise 75% to $21.3 billion in fiscal 2023, which would finally represent a 2% increase from its $20.8 billion in revenue in fiscal 2019, as the company narrows its net loss to $245 million.
Carnival expects its occupancy percentage to stay above 100% for the full year as the travel boom continues, but its long-term debt -- which remained at $31.9 billion at the end of the first half of fiscal 2023 -- could continue to cast dark clouds over its future until it turns profitable.
Altria isn't generating smoking hot returns
Altria, which spun off its international division as Philip Morris International in 2008, has faced with declining domestic smoking rates for decades. However, it repeatedly offset that pressure by raising its prices, cutting costs, and buying back its shares to boost its revenue and earnings per share (EPS). It also diversified its business beyond cigarettes by selling cigars, snus, and other products.
Those strategies enabled Altria to grow revenue at a CAGR of 5% from 2014 to 2019, even as its annual cigarette shipments dropped from 125.4 billion sticks to 101.8 billion sticks. The retail market share of its flagship Marlboro, which accounts for most of its cigarette shipments, also dipped from 43.8% in 2014 to 43.1% in 2019.
NYSE: MO
Key Data Points
The pandemic didn't severely impact Altria's sales, but the broader slowdown of the domestic cigarette market intensified over the past few years. The company's revenue rose 5% in 2020, but grew a mere 1% in 2021 and declined 2% to $20.7 billion in 2022. Its annual cigarette shipments dropped to just 84.7 billion sticks last year, while Marlboro's retail market share shrank to 42.5%.
To address that slowdown, Altria acquired a 35% stake in the domestic e-cigarette maker Juul for $12.8 billion in 2018 -- but that investment withered after the Food and Drug Administration (FDA) banned all of Juul's products last year. To recover from that big setback, Altria recently acquired the e-cigarette maker Njoy -- whose products were already approved by the FDA -- for $2.75 billion on June 1.
However, Altria expects that takeover to reduce its full-year adjusted EPS growth to between 1% to 4% this year -- compared to its prior outlook for 3% to 6% growth. It doesn't expect the deal to be accretive to its adjusted EPS until 2026.
That outlook is murky considering how bloody Altria's balance sheet is. It ended its latest quarter with $24 billion in long-term debt, and its shareholder equity is negative -- implying it owes more money to its investors (not just its creditors) than its assets can cover. It also suggests that its massive forward dividend yield of 8.5% could be reduced in the near future.
The winner: Carnival
Both of these fallen stocks have serious flaws, and I'd rather stick with more reliable blue chip stocks with healthier balance sheets. But if I had to pick one of these stocks, I'd definitely buy Carnival because it has a clearer path toward a long-term recovery than Altria -- which is still struggling to overcome the slow-motion collapse of its core market.
