It's been fairly smooth sailing for Carnival (CCL +3.39%) (CUK +3.32%) stock since the start of 2023 -- it has gained close to 60% year to date. That improvement reflected the company's progress in many areas -- from paying down debt to announcing revenue growth and strong demand for its cruises. In its fiscal third quarter, the good news continued, with Carnival reporting its highest revenue ever.
But when that report came out on Sept. 29, Carnival shares didn't jump. In fact, over the past month, they've slipped by about 19%. In spite of the cruise company's improving situation, it faces one particular near-term challenge that could weigh on its recovery from tough pandemic times and its ability to grow. I'm talking about rising oil prices, which make it more costly to power cruise ships. Should investors be worried?
Taking on debt
First a bit of background on Carnival's path so far. Beginning in March 2020, as the pandemic surged, cruise companies were forced to halt operations of their ships for many months, and this meant Carnival had to take on more and more debt to stay afloat. That extended shutdown meant this long profitable company shifted into loss territory.
CCL Net Income (Annual) data by YCharts.
Once Carnival's ships returned to the seas, though, the company quickly prioritized paying down the heavy debt load it had taken on and streamlining operations to return to profitability. Efforts included replacing older ships with newer, more efficient ones, maximizing opportunities to collect shipboard revenue, and focusing capacity growth on brands that had delivered the strongest revenues.
The world's biggest cruise line operator also is benefiting from impressive general demand for its cruises, with growth in booking volumes and customer deposits in recent quarters. Today, the company's advanced booked position for the year surpasses its historical range, and at higher prices than last year. And total customer deposits reached a third-quarter record of more than $6 billion.
This has helped the company progress toward its financial goals of profitability and debt repayment. U.S. GAAP net income and adjusted EBITDA in the quarter beat the June forecast range, and revenue hit a high of $6.9 billion. Carnival also cut its debt by almost $4 billion from its peak earlier this fiscal year.
The full impact of rising oil
All of this is great news, offering investors a reason to be confident about the company's progress so far and its future prospects. But rising oil prices could stand in the way, as they drive fuel costs higher. Some cruise companies hedge against rising fuel prices by locking in their fuel prices well in advance, which protects them against large swings in oil prices, but Carnival doesn't. That means it experiences the full impact of rising crude oil, and therefore, fuel prices, on its bottom line.
Today's high fuel prices along with the negative impacts of foreign currency exchange rate moves represent a $130 million weight on Carnival's earnings -- nearly overshadowing the $200 million Carnival is adding to its bottom line in the second half thanks to all of its recent efforts.
But, before investors become overly alarmed, it's important to consider a few points. First, these oil price levels are likely to be temporary -- and certainly, they have not occurred very often. Carnival said there's only been one other time over the past 15 years when it has faced fuel prices as high as those of today.
Second, Carnival has made several efforts to reduce the impact of higher fuel prices -- today and over time. For example, the company has the most fuel-efficient fleet in the industry, and it continues to make efficiency improvements. Carnival also is developing Grand Bahama Port, which will become its largest Caribbean destination and will facilitate a wide variety of lower-fuel-use itineraries.
Finally, this year's fuel consumption should come in 16% lower per available lower berth day than it did in 2019. What this means is Carnival is spending less on fuel per passenger today than it was back then.
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Should we worry or should we buy?
So should we worry about the impact of fuel prices on Carnival's growth? In the near term, they surely will be a headwind. But the strength in bookings -- and at higher prices -- as well as Carnival's efforts to improve its fleet's fuel efficiency should help the company weather the storm.
Higher fuel costs could slow down the company's pace when it comes to repaying debt or returning to profitability -- but I wouldn't expect this slowdown to be dramatic.
And that's why, right now, while some are selling off Carnival, it might be a good opportunity to get in on this recovery player.
