Last year was a tough one for companies as inflation soared and the general market fell into the doldrums. Companies faced higher costs -- and consumers had less money to spend on products and services. All of this also left many investors feeling glum and thinking twice before buying stocks. These periods are rough for everyone, but the good news is they always lead to better times -- and they generally offer us buying opportunities.
Right now, a great place to find these opportunities is in companies on the road to recovery. Two of my favorites are Carnival (CCL -0.66%) (CUK -0.88%) and Disney (DIS -0.04%). The general economy and other factors have weighed on these entertainment giants, but better days may be ahead. Which one makes the better recovery story buy right now? Let's find out.
The case for Carnival
Carnival's had an even bigger problem than rising inflation in recent years. The world's largest cruise operator had to halt sailings during the earlier days of the pandemic, and that sent debt soaring and earnings tumbling.
CCL Total Long Term Debt (Annual) data by YCharts
So, Carnival already was navigating difficult waters before the latest economic troubles. But the company has made significant efforts to cut costs, boost growth, and pay down debt. For example, Carnival has optimized its portfolio of ships -- replacing older, less efficient ships with newer models, and focusing capacity growth on the brands that have brought in top returns.
Carnival also has made moves to control fuel costs in an innovative way. It's developing a port in the Bahamas that will offer the cruise company a variety of low-fuel consumption itineraries.
As for debt, Carnival recently progressed here too. In the most recent quarter, Carnival prepaid $1.4 billion in variable rate debt. This is particularly important during these times of rising interest rates. The move leaves Carnival less vulnerable to rate increases as 80% of its debt now has fixed rates.
Finally, these and other moves are producing results we can see in Carnival's earnings report. And, at the same time, demand for cruises is soaring. Carnival reported record second-quarter revenue of $4.9 billion, and customer deposits hit an all-time high.
It may not be smooth sailing just yet for Carnival, but the cruise giant is on the way.
The case for Disney
Disney also suffered as it shuttered its parks during the early days of the pandemic. But the company's biggest problem in recent times has been ballooning costs linked to its streaming services. Disney invested heavily to grow streaming, especially Disney+. And membership climbed. But for the latest full year, the direct-to-consumer -- this is the streaming business -- operating loss widened to $4 billion from $1.6 billion.
Late last year, the entertainment giant called back former chief executive officer Bob Iger to put Disney back on the path to growth. Originally, he was set to stay for two years, but the company recently extended the contract for an extra two years.
So far, Iger has set out a plan to achieve $5.5 billion in cost savings. To get there, Disney is cutting jobs, and reducing spending in various areas such as marketing. Iger also has reorganized management to put more control into the hands of creative teams -- so they can see projects from start to finish and take financial responsibility along the way.
Last month, Iger said he's looking for a strategic partner for ESPN and eventually aims to transition the sports channel to a streaming business.
Iger's efforts are starting to bear fruit. In the most recent earnings report, Disney's direct-to-consumer operating loss narrowed to $659 million from $887 million. And the company's strongest business -- parks, experiences, and products -- continued to grow revenue and operating income in the double digits.
The extension of Iger's contract is a sign Disney's recovery will take time. But, if Disney continues along this path, the future may be bright.
Carnival or Disney?
Let's consider the share prices. Carnival has soared in the triple digits so far this year, while Disney stock is little changed. From a valuation perspective, they both are reasonably priced though. Carnival trades for 1.3 times sales -- in the five years prior to the pandemic it generally traded around 2.4 times sales.
Disney trades for 22 times forward earnings estimates, down from more than 40 early last year.
I'm positive about both stocks and think they have what it takes to recover and gain over the long term. But if I had to choose just one to buy today, I would go with Carnival. This is a departure from my previous preference for Disney. Why the change? Disney's recovery plan right now involves many moving parts -- and I'm thinking specifically of the ESPN situation.
And Iger's additional two years on the job mean it may take longer than originally expected to work through certain problems. All of that's fine. But the uncertainty may weigh on Disney shares for a while.
Carnival stock has climbed quickly and may not continue along at the same pace. But catalysts remain. Even though Carnival's debt is significant, cruise demand and the company's efforts along the path to profitability are encouraging. And any good news in those areas could lift the stock further.
So, if you don't mind a bit of risk, it's not too late to get in on this top cruise stock.
