The waves keep rising for Carnival (CCL -0.66%). Shares of the world's largest cruise line operator have more than doubled this year, and the Wall Street accolades keep coming. The latest vote of confidence came Tuesday as Argus analyst John Staszak upgraded Carnival stock from hold to buy.
Carnival has soared 126% in 2023, a bon voyage to anyone who bought into the cruising industry at the beginning of the year. With sailings now back at full strength, it doesn't seem as if investors were going out on a limb in predicting that business would be booming in 2023. Where do we go from here? Is it too late to buy Carnival now? Is it time to sell? Let's see what exotic ports of call the market may have in store for the shares in the coming months.
The water's fine
We know where Staszak at Argus stands following this week's upgrade. He continues to see more upside. With Carnival comfortable with spending more on marketing, the near-term outlook for robust bookings and growing revenue is positive. Staszak also feels that Carnival's improved liquidity will make it easier to pay down its debt, a big deal since Carnival's long-term debt has more than tripled to nearly $32 billion since the pandemic shut down operations for a long time.
The long-overdue return to profitability -- we're at 14 consecutive quarters of red ink -- will also make it less likely that Carnival taps the equity market to raise financing by issuing more shares. Carnival's outstanding shares have ballooned 84% since the end of fiscal 2019. The buoyancy of the stock this year may tempt Carnival to print more shares at current prices, but it's no longer necessary to assure its survival.
Image source: Getty Images.
Carnival's latest report -- it posted its fiscal second-quarter results covering the three months ending in May a few weeks ago -- was initially received poorly by the market. The stock took an 8% hit the day it reported in late June, but it has gone on to soar 25% since then.
The report was positive despite the initial price action. It was the third consecutive beat on the bottom line after Carnival had fallen short through most of the post-pandemic recovery. A return to profitability during the current quarter is now practically a given. Staszak also points out that Carnival has made the most of the initial lull during the COVID-19 crisis to make its fleet more efficient.
Carnival's near-term prospects have never been stronger than they are right now. Bookings for future sailings made during the fiscal second quarter hit a new record high, and the $7.2 billion it holds in customer deposits for upcoming cruises also shatters the previous record by $1.2 billion.
Justifying the stock's valuation in this rosy climate is a little trickier. Its enterprise value has soared given its combination of rising stock price, share count, and net debt. One can also argue that there are geopolitical and global economic fears on the horizon. You still have to side with the bulls when its comes to Carnival in particular and cruise line stocks in general. The biggest concern coming out of the pandemic was that travelers wouldn't come back after all the headlines about viral outbreaks on ships during the early days of the crisis. Well, passengers are back, and they're willing to pay a premium. Investors should probably do the same thing.
