Cruise line stocks are rising again. Carnival (CCL -0.66%) is leading the way: Shares of the market leader have more than doubled this year. Unlike the surge in 2020 after the initial COVID-19-related sell-off -- Carnival stock would nearly triple by the end of that year from its springtime low -- the upticks in 2023 feel warranted.
The world's largest cruise line operator is seeing its business recover to pre-pandemic levels, at least on the top line. Future bookings are strong, and the industry itself is smarter than it was before. Carnival stock is somehow trading lower today than it was at the end of 2020, but it doesn't mean that the market cap or enterprise value are lower. Carnival had to do some pretty dilutive things to remain literally and figuratively afloat when it wasn't allowed to entertain paying passengers coming out of the COVID-19 crisis.
Let's go over why Carnival is in better shape than some bears think. Don't worry, naysayers. I'll touch on some of the pressure points, too. You have to look at the good, the bad, and the ugly to decide if a stock is worth boarding, disembarking, or riding out.
Showing up early to the midnight buffet
Carnival is sailing in the right direction, and that became crystal clear last week when it announced the closing of $500 million in first-priority senior senior secured notes at 7%. It also upsized an earlier offering of a senior secured first lien term loan B facility to $1.3 billion. It will use the proceeds to repay an existing term loan.
One can argue that this is a lousy time to take on new debt. Most companies taking on fresh financing in today's challenging climate for borrowers are facing high interest rates. It's different with Carnival. It's replacing a loan made in a more desperate time in its recovery efforts. The new notes will clear out obligations that were more taxing to Carnival's resources. The cruise line is pushing out repayment timelines and shaving $120 million in annualized interest expense in the process. It's the right flex for the ascending travel industry giant.
Revenue has more than doubled for eight consecutive quarters. The starting line for that run is admittedly depressed. Cruise lines were the hardest hit of the tourist transportation markets in 2020. However, we're finally at the point where Carnival will achieve record revenue results in fiscal 2023. Demand is booming. Landlubbers are discovering the joys of ocean travel again. Bookings for future sailings made in Carnival's latest quarter hit a new record. The $7.2 billion the the cruise line operator is holding in customer deposits for future sailings is $1.2 billion more than it has held at the end of any quarter.
Image source: Getty Images.
The only thing missing from this recovery is the bottom line, but that's also on the mend. Carnival has posted 14 straight quarterly deficits, but that streak is highly likely to end this summer. All 13 of the major analysts putting out profit targets see Carnival returning to profitability in the current fiscal third quarter that ends this month.
The caveat to Carnival's recovery from an investor perspective is that it's not fair to look at a stock chart for historical perspective. The company had to take on a lot of debt at high rates and print new shares at low stock prices to make it through the prolonged pandemic shutdown. Carnival's long-term debt has more than tripled to nearly $32 billion -- and its share count has nearly doubled -- since fiscal 2019. It will have to do more than just return to prior revenue and margin levels to surpass its pre-pandemic earnings records on a per-share basis. It could happen.
Customers are willing to pay more for watery escapes on this end of the pandemic. Cruise line stocks have also found new ways to enhance the experience and more effectively monetize their passengers.
Carnival paid investors $2 a share in dividends in fiscal 2019, a yield of nearly 12% at today's price point. Unfortunately, Carnival isn't going to be paying out that kind of money now. There are a lot more shares outstanding today. There's a lot of debt to repay. It may take years before the company is comfortable reinitiating its distributions, but capital gains should offset the trickle of dividends if Carnival keeps heading in the right direction. It looks like a buy at this point, especially after the recent 14% pullback from last month's 52-week high.
