Carnival (CCL 4.92%)(CUK 4.95%) has lifted itself up from rock bottom to surpass previous sales records and keep growing. It's been a long and dramatic journey, and there are parts of it that will remain for the foreseeable future. Let's see where this leading cruise line is going, why the pandemic impact still lingers, and whether it's worth investing in.
Full speed ahead
Carnival has made a stunning comeback after cancelled cruises sunk revenue to zero. It got meme stock status as retail investors bet on its chances, but it's now demonstrated that it's more than a meme as it steers itself back to growth.
This recovery has been in progress for a while, but it was sustained in the 2023 second quarter as the company posted record revenue of $4.9 billion. Demand continued to accelerate, and Carnival had record quarterly bookings, up from last quarter's record. Customer deposits reached a record $7.2 billion, 26% more than last quarter, and cash from operations was $1.1 billion, positive for the second consecutive quarter.
What could still go wrong
These are all signs of incredible progress, but the company's not quite in the clear just yet.
For one thing, it's still posting heavy net losses, which amounted to $407 million in the second quarter. The company has done well in efforts to reverse those losses, and it had a strong history of profit generation leading up to the pandemic.
Data source: YCharts
It's likely to get back to profitability as operations fully resume. It's also demonstrating improvement in other metrics, such as operating income, which was $120 million and positive for the first time since resuming operations. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which strips out what the company sees as non-core expenses, came in at the high point of company forecasts in the second quarter at $681 million, up from close to a $1 billion loss last year.
Then there's the debt. Carnival issued lots of debt to stay solvent when there was no revenue during the pandemic lockdowns, and that's now a huge liability on the balance sheet. Management said that the second quarter was an inflection point in "deleveraging the balance sheet" as it passed peak debt, paying down $1.4 billion. However, it will take years to pay it off.
As demand stays strong and revenue increases, the company has been efficiently managing the business while paying down debt and moving toward net profit. Management is predicting adjusted net income to be positive in the second half of the year, which should keep the stock momentum going -- the shares have more than doubled so far this year.
Back in business
Management expects these trends to persist in the near term. They company raised its forecast for adjusted EBITDA for the full year, and gave an estimate of $2.1 billion for the third quarter, more than three times the second-quarter number.
So that's what to be confident about and what to be wary of. The company is doing an excellent job of managing demand and debt repayment, and although there's risk, it doesn't look prohibitive in light of current trends and efficient operations.
The next question is whether this is already baked into the share price. After this year's price surge, Carnival stock trades at 1.2 times trailing 12-month sales, which is not expensive. It can't support a very high valuation because of its high debt, but as sales increase, the price could go up without altering the price-to-sales ratio very much.
I think there's still plenty of upside for Carnival as its recovery continues and it moves toward profitability, but risk-averse investors might want to sit this one out for now.
