Wall Street wasn't impressed by the fiscal third-quarter results that Carnival Corp. (CCL -0.66%) posted on Friday morning. Shares of the world's largest cruise-line operator have retreated in each of the two trading days since serving up its fresh financials.
The reaction doesn't seem fair, because there's a lot to like in Carnival's historically significant performance for its summertime quarter covering the three months that ended in August. Carnival is coasting along, even if its stock has been drifting after an initially hot start in 2023.
The following chart shows how Carnival's results broke down in the quarter. Let's start there before digging into the reasons that now might be the right time to book a sailing on the stock itself.
Data source: Carnival.
1. Carnival is now profitable
After 14 consecutive quarters of losses, Carnival finally turned a profit in last week's report. It wasn't a surprise that it managed to paddle its way out of a deficit for the first time since late 2019. Every analyst following the company was forecasting positive bottom-line results, two months after Carnival's smaller rivals did the same thing.
This is a seasonal business. Summer is the peak period for most travel companies, aside from ski lodge operators. The three leading cruise lines weren't profitable last summer because the market was just starting to recover. Things are far better now, explaining why Carnival is profitable for the first time in nearly four years.
Carnival is faring even better on the top line. It generated $6.9 billion in revenue for its fiscal third quarter, a new record. Revenue rose a better-than-expected 59% off of last summer's muted recovery.
2. The earnings beats are getting stronger
It's not just the top-line results that exceeded market expectations. The $0.86 a share that Carnival posted in its earnings breakthrough was comfortably ahead of the $0.75 analysts were targeting. Even the most optimistic of the 13 major analysts following Carnival wasn't expecting it to earn as much as it did.
This also isn't taking anyone outside of Wall Street pros by surprise. Running a cruise line is a scalable business that's heavy on fixed costs. If ship berths are filled with premium passengers, it's going to have an even more pronounced impact on the bottom line. You can see it in the chart. Cruise and tour operating expenses, selling and administrative costs, depreciation and amortization, and interest expense -- the four largest cost components -- rose by 3% to 23%. Great things will happen to margins when the top line is shooting 59% higher in that scenario.
However, zoom out and the trend on the bottom line is even more comforting. And interesting.
| Quarter | EPS estimate | Actual | Surprise |
|---|---|---|---|
| Q4 2022 | ($0.87) | ($0.85) | 2% |
| Q1 2023 | ($0.60) | ($0.55) | 8% |
| Q2 2023 | ($0.34) | ($0.31) | 9% |
| Q3 2023 | $0.75 | $0.86 | 15% |
Data source: Yahoo! Finance.
Companies tend to beat Wall Street estimates. It's the default setting. However, the gap between the actual profit and market expectations is widening. Investors had a reason to ignore the beats when Carnival was still in the red, but it's finally in the black. Investors will start to respect the beats more now.
3. Carnival stock is ready to bounce back
Carnival got 2023 off to a strong start. The shares more than doubled through the first six months of the year. The stock has gone on to shed 28% of its value in the third quarter.
The starting line is attractive, even with a couple of near-term challenges. Fuel costs are rising, and we're heading into the seasonally sleepy part of the calendar for cruise line stocks. The industry is also susceptible to any economic hiccups or any potential global travel disruptions. However, bookings remain strong at healthy price points. Carnival's liquidity is strong, and it trimmed nearly $4 billion from its debt since peaking earlier this year. The tailwinds outnumber the headwinds. This looks like a smart time to venture into the high seas.
