By now, the saga of the cruise industry is a familiar one. Cruise ships were stuck in port for much of the pandemic, leading to companies like Carnival (CCL -0.66%) taking on billions in debt and diluting shareholders to stay solvent through the crisis.
Now, in 2023, cruising is all the rage again. Demand is at record levels, but the stock of Carnival, which is the world's biggest cruise line, is still down significantly from its pre-pandemic levels, off 74% from where it stood in early 2020 before COVID wreaked havoc on the travel industry.
According to some definitions, we're already in a new bull market as the S&P 500 has climbed more than 20% from its bear-market bottom, and even after a pullback in September, Carnival looks to be in a good position to be a winner in the next bull market. Keep reading to see why.
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1. Demand remains strong
Even as discretionary retailers are struggling in the current environment, demand for travel continues to grow, and Carnival just showed off some impressive results in its third-quarter earnings report.
Revenue hit an all-time high at $6.85 billion, up 5% from 2019 levels and topping the consensus at $6.69 billion. Customer deposits reached a third-quarter record at $6.3 billion, and management said its advanced booked position for 2024 is above the high end of its historical range and at a higher price than for 2023.
In the recent earnings call, CEO Josh Weinstein also commented on broader concerns about the economy: "Now we appreciate there are heightened concerns around the state of the consumer as of late. But the fact is, we just haven't seen it in our bookings or our results, and we believe consumers are continuing to prioritize spending on experiences over material goods."
The strong demand is showing up on the bottom line: Net per diems, a measurement of daily contribution profit per passenger, were up 4.4% from 2019 levels, and the company just raised its per diem guidance for the year by a percentage point.
2. The balance sheet is improving
Stabilizing the balance sheet and reducing its debt burden has been a top priority for the company since the pandemic ended, and it continued to take steps toward that goal.
Over the last two quarters, the company has reduced its total debt balance by more than $4 billion, $2.4 billion of which came in the third quarter, and management said it expects to end the year with less than $31 billion of debt.
It currently has $5.7 billion in liquidity, giving it substantial financial flexibility as it aims to normalize its balance sheet.
Management is also prioritizing its highest-cost debt, and in just the third quarter, it lowered its gross interest expense by $200 million.
The company still paid $518 million in interest in the quarter and expects to pay $1.9 billion in interest for the year, which represents both a challenge and an opportunity. As it reduces its debt burden, it will gain significant leverage on the bottom line.
3. The price is right
Carnival is still expecting a small loss for the year on the basis of generally accepted accounting principles (GAAP), but it's on target for more than $4.1 billion to $4.2 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Based on enterprise value to EBITDA, the stock trades at a ratio of about 12, which seems like a good price for a company like Carnival that's reducing its debt and improving profitability with strong demand trends and better pricing.
On a cash-flow basis, which is what ultimately counts for repaying debt and returning cash to shareholders, the company generated $1.9 billion in free cash flow through the first three quarters of the year and will add to that in the fourth quarter.
Carnival stock fell 5% after the third-quarter earnings report came out because investors were disappointed with guidance for the fourth quarter, which was affected by higher fuel prices. The stock is now down 30% from a recent high in July.
The cruise industry is highly cyclical, and the stock would certainly benefit from investor confidence in the next bull market. The good thing for investors is that it's a matter of when, not if, and the company looks prepared for 2024, no matter what the global economy brings.
