Carnival (CCL 1.41%) is one of the companies that's still being affected by the pandemic, both by the aftereffects of restrictions and by the financial leverage it took to get through the pandemic. While operations are recovering, Carnival's stock is trading near its decade lows, and it's not clear if the company will be able to pay down debt quickly.
Recent results showed some positive signs, but we need to dig deeper to get to the bottom of whether Carnival stock is a buy, sell, or hold.
A recovery for cruise lines
It's hard to argue that there's not a big recovery in cruise lines right now. Fiscal third-quarter 2023 revenue for Carnival was an all-time record $6.9 billion, and customer deposits now stand at $6.3 billion.
Management said that the "cumulative advanced booked position for full year 2024 is well above the high end of the historical range at higher prices (in constant currency) than 2023 levels," which indicates that both demand and pricing are strong.
There was even $1.6 billion in operating income for the quarter, well exceeding the $518 million in interest expense that Carnival needed to pay. But that's where the risk to the business comes in.
As good as it gets?
There's been a boom in demand for all kinds of travel and experiences, from cruises to airline flights to stays on the Las Vegas Strip. But it's worth asking if the best days are behind us.
In the most recent quarter, Carnival's occupancy was 109%, which means that on average more than two people stayed in each room on a cruise ship. This isn't impossible, but it's unusual for it to be that high. In fiscal 2019, occupancy was 106.9%, so pushing any higher than today seems unlikely.
The relatively high prices and very high occupancy are good for Carnival today, but with the economy facing an uncertain future as interest rates rise, student loan repayment resumes, and inflation eats into people's paychecks, it's not clear that there's further upside from here.
The pandemic overhang
Improving operations is good, but below you can see that Carnival's enterprise value (market cap plus debt) is still about the same as it was before the pandemic. The biggest change has been a huge increase in debt, which currently stands at $31.3 billion. That debt carries costs from interest payments and eventually will come due, although debt was reduced by $2.4 billion last quarter.
CCL Enterprise Value data by YCharts
However, it's worth noting that Carnival didn't generate $2.4 billion in earnings to pay down debt -- it's using customer funds to pay down debt. Between the end of fiscal 2022 and the end of fiscal Q3 2023, Carnival's customer deposits increased by $1.1 billion, but cash on hand fell by $3.2 billion.
This is still a company with more debt than it can afford. Until that changes because of a refinancing or operations get significantly better, the stock is at risk.
Carnival is still a sell
Improving operations are a great sign for Carnival, but I'm afraid that the best days are behind us and Carnival will now face falling occupancy, more price pressure, and less of a windfall from deposits increasing.
But the debt is really what I don't want to take a risk on. Any downturn in the economy could put Carnival under even more pressure, and it's stockholders who would pay the price if operations get worse.
