Carnival (CCL -0.66%) (CUK -0.88%) has turned a corner, and it's so far past it, you almost can't see the twists it has left behind. It's now back to its regularly scheduled growth -- or is it? Let's examine where Carnival is headed and why now might not be the best time to buy shares.
Plenty of progress
It hasn't been easy for Carnival the past few years, and that's an understatement, considering it ceased operations for a few months. But it's been a market-beating stock for decades due to a great product, its No. 1 spot in its industry, and predictable growth.
That was enough reason to be confident it could bounce back, and although its stock has been all over the place, it's now up 100% this year as it has made close to a total recovery.
Revenue has completely rebounded and achieved a record in the 2023 fiscal second quarter (ended May 31) at $4.9 billion. Customer bookings reached a record, with an all-time high of deposits at $7.2 billion, more than $1 billion more than the previous record of $6 billion.
Operating income was positive for the first time since the pandemic started, at $120 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were $681 million. It expects adjusted EBITDA to jump to more than $2 billion in the third quarter.
CCL operating income (quarterly) data by YCharts.
Why the past is not yet erased
As incredible as the progress is, there's more to go. Carnival used to be very profitable, but now it's posting net losses as it rebuilds its business. It continues to improve, but there was still a $407 million loss in the second quarter. The adjusted net loss was $395 million, and management expects that to turn positive, to $1 billion, in the third quarter.
Adjusted metrics take into account or exclude some charges, like impairments and ship sales, that management sees as outside of its core activities.
It took on a huge debt load to keep going when there were no cruises, and it's paying that off as cash flow from operations increases. It has already paid off more than $1 billion and has more than $7 billion in liquidity, which is great progress. But it still has more than $30 billion in long-term debt to pay off.
While that could be manageable, especially as revenue and cash generation increase to cover interest payments, it puts Carnival in a risky position in which it might not be able to handle large financial disruptions.
It announced what it calls its SEA Change program, with three-year targets of sustainability and profitability to reach by 2026. After building up revenue, it's now pivoting to the more-delicate dance of balancing growth and boosting profits, with the goals of getting the debt down and being in a healthier financial position.
A great long-term stock, but now might not be the time to buy
Even long-term investing isn't only about the future. Investors always have to consider the valuation, because the real value of the stock will inevitably impact its price movement.
Carnival stock trades at a price-to-sales ratio of 1.1 times trailing-12-month sales, or below historical levels. So by that metric, it doesn't look expensive. But the price has plateaued and even come down somewhat this year after skyrocketing with the recovery. At this point, revenue growth might begin to moderate, and the stock could give back more of its gains as it stabilizes.
The future does look bright, and Carnival is likely to get back to being a profit-generation machine. Before the pandemic, it traded at an average price-to-earnings ratio of around 17, so look out for an attractive entry point when it gets closer to profitability.
