Carnival (CCL -0.36%) stock has been a hot buy in 2023 with travel demand soaring. Year to date, it has risen 140%. But after the cruise line operator reported its latest quarterly results last month, its shares fell despite what looked to be a strong performance as investors may have been expecting more.
However, Carnival's stock could remain a great buy for the following three reasons.
1. Carnival expects $3 billion in annual adjusted free cash flow
One concern investors may have about Carnival is that it's carrying roughly $32 billion in long-term debt on its books -- a heavy load.
But the company's financials are in better shape than they've been in for the past few years. Carnival is projecting that over the next three years, its annual adjusted free cash flow will total at least $3 billion. During that time, it also expects to reduce its debt by $8 billion, making it a safer investment that could attract those who have previously been concerned about the business' long-term risks.
Now, with its operations pretty well back to normal, Carnival is generating positive cash flow that is approaching pre-pandemic levels.
CCL Cash from Operations (Quarterly) data by YCharts.
2. The company has ample liquidity
When cruise ships were shut down during the early stages of the pandemic, there were concerns that Carnival and its peers might not be able to weather the storm. But those fears are long gone, and travel demand has been strong of late.
As of the end of its fiscal second quarter on May 31, Carnival reported available liquidity of $7.3 billion. That gives it a good buffer in the event that economic conditions worsen. With that much liquidity and with the company now generating more than $1 billion in cash from operations quarterly, there's no question Carnival has become a much safer stock to invest in.
3. Carnival has been posting record numbers
Safety is important, but investors also want growth, and Carnival has been delivering on that front as well. In its fiscal Q2, the company reported encouraging results, even posting an operating profit of $120 million versus its loss of nearly $1.5 billion in the prior-year period.
It also reported many records and all-time highs:
- Revenue of $4.9 billion was a second-quarter record.
- Customer deposits hit an all-time high of $7.2 billion as of the end of May.
- Booking volumes in Q2 also set a record, topping the prior high set in Q1.
Business shows no signs of slowing down, either. Management projects that for fiscal Q3, ship occupancy levels will hit 107% -- or higher. (Occupancy rates above 100% can occur because in some instances, three guests or more can be staying in what are counted as double-occupancy cabins -- for example, when a child travels with their parents.) As such, Carnival could post more record numbers later this year.
Should you invest in Carnival Cruise stock today?
Carnival's stock is still nowhere near the $40-plus levels it traded at before the pandemic. If the company can continue performing well and its bottom line improves, there could be much more upside for the stock. Right now, it's still trading at a forward price-to-earnings multiple of over 170, which will look daunting to some investors. But over time, that multiple should come down as profits rise.
There's still some risk here, particularly given the current macroeconomic conditions, but if you're willing to buy and hold the stock for the long term, Carnival could make for an excellent investment.
