Carnival (CCL -0.66%) (CUK -0.88%) shares plummeted earlier in the pandemic. That's after the cruise giant halted cruising operations and swung from a profit to a loss. At the same time, Carnival took on billions of dollars in debt to keep going until it could set sail again.
Fast forward to today. Carnival's ships are sailing, demand is soaring, and the company is progressively making its way back to financial health. Since the start of the year, investors have recognized these positive trends, and they've been piling into Carnival shares. The stock is still far from its pre-pandemic levels. But it has posted a triple-digit gain since the start of January. How much would you have now if you'd invested $5,000 in Carnival then? Let's find out.
A triple-digit gain
Carnival has soared 135% since the start of the year. So, if you'd invested $5,000 in the stock at that point, today your investment would be worth $11,750. That's an impressive increase in a pretty short time period. Now the question is: Should you sell, or does Carnival hold more potential?
I always favor long-term investing. So, if I had bought Carnival in January, I would have done so with optimism that the company and stock could perform over at least the coming five years. Of course, it's possible to change course earlier. For instance, a company might change strategy, or a black swan event may hurt the long-term outlook. In those cases, you may decide to exit early.
In the case of Carnival today, though, the picture is looking brighter and brighter. In the most recent earnings report, the company said total bookings and customer deposits reached all-time highs. Carnival reported record second-quarter revenue of $4.9 billion, and the company's net loss came in lower than expected.
This doesn't mean it's smooth sailing for the world's biggest cruise operator, though. One big challenge remains. And that's debt. As mentioned above, Carnival significantly increased its borrowings to get it through the toughest of times. That means that today, its debt-service coverage ratio isn't looking good. This measures a company's ability to pay its debts.
CCL Operating Income (Annual) data by YCharts
Still, Carnival offered investors some encouraging information on the subject of debt in its recent earnings report. In the quarter, cash from operations and adjusted free cash flow came in positive. Carnival expects this to continue -- and serve as a driver to pay down debt.
Prepaying variable rate debt
Carnival also said it prepaid more than $1 billion of variable rate debt. This is important because, by paying down variable rate borrowings, Carnival will be less sensitive to potential interest rate hikes. The company says that 80% of its debt now has fixed rates.
So, debt remains a headwind for Carnival -- and is likely to absorb cash flow that in other times might have been used for growth. This situation will persist for some time. Though debt is down from a peak of $35 billion, Carnival still predicts its total year-end debt will settle at just under $33 billion.
Now, let's get back to our earlier question. Should you sell Carnival shares now after their big run? Or could the cruise powerhouse deliver more over time? If you're a cautious investor and worry about Carnival's debt levels, you may not want to stick around. As mentioned, debt is going to be part of the Carnival picture for the foreseeable future. And, after a winning performance in the first half, the shares may lose some momentum in the near term.
But if you can handle some risk, there's reason to hold on to Carnival. Even if the stock doesn't replicate its first-half performance in the second part of the year, it still could move higher over a period of years. Carnival has offered us plenty of positive signs, from booking trends to earnings recovery and debt repayments. So, as a shareholder, the best thing to do now is sit back comfortably -- as if you're on the deck of one of Carnival's cruise ships -- and hold on for the long term.
