Carnival (CCL -0.66%) (CUK -0.88%) stock has been intensely followed since it tanked at the beginning of the pandemic when operations shut down. It became a meme stock, but it has valiantly recovered and looks to be on the road to growth.
Investors who bet on Carnival's rebound are now sitting on some enviable gains as the stock is up 134% this year. Is it too late to buy into this story?
Sometimes turnarounds do happen
As companies go, Carnival was surely one of the most heavily impacted by the pandemic. Its business essentially came to a halt, and it borrowed enormous sums to get through the closures. Now that it's made it through, it's the recipient of incredible demand and surging sales.
After posting record quarterly bookings in the 2023 first fiscal quarter (ended Feb. 28), Carnival broke that record and set a new one in the second quarter. Total customer deposits reached an all-time high of $7.2 billion, and revenue of $4.9 billion exceeded pre-pandemic levels and was also at record levels. Carnival has been able to raise prices since demand is robust, leading to even stronger sales.
Operating income of $120 million was positive for the first time since the company resumed operations, and net loss of $407 million was better than guidance and an improvement from $1.8 billion last year.
With this strong performance, cash from operations and adjusted free cash flow were both positive in the second quarter, allowing Carnival to pay off $1.8 billion of debt principal. Management expects to continue deleveraging its balance sheet in the back half of the year and for the company to comfortably pay off the debt for the foreseeable future.
Carnival raised its guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the full year to about $4.17 billion after the results from about $4 billion. It expects adjusted EBITDA of about $2.07 billion for the third quarter, up from $681 million in the second quarter, with adjusted net income of $1 billion.
Oh no, not again
The problem with these types of stock gains is that they often go hand in hand with investor enthusiasm and stock hyping instead of moving along with company growth. In an ideal world, stock prices would always reflect the underlying value of the business. But the market isn't necessarily rational. One the one hand, that provides opportunities when the market misses a great stock. On the other hand, it means investors can get caught in the idea of a stock or the excitement of rising prices.
At the current price, Carnival stock trades at 1.3 times trailing-12-month sales. That might seem incredibly cheap compared to some other companies, but it takes into account how much pent-up demand could be lifting revenue on a temporary basis. Moreover, investors are still concerned about Carnival's need to pay down its enormous debt.
CCL PS Ratio data by YCharts
Yet it's possible that investors haven't missed the boat, or cruise ship, here. If Carnival continues to recover and generate more sales growth from customer demand, then its stock price could still rise without appearing to be expensive. There's still some risk since Carnival's debt remains high, and the company needs to continue generating strong demand for many years to be able to pay it off. It doesn't have a lot of room for error.
Risk-tolerant investors can feel comfortable taking a position now, but most investors should wait for sustained improvements in demand and profitability.
