The cruise line industry has been a battleground for investors ever since the pandemic battered this travel sub-sector. Stocks like that of Carnival (CCL -0.66%), the world's largest cruise line, plunged during the shutdown period as cruise ships were grounded. Since then, demand has been strong and the stock has begun to claw itself out of that deep hole. However, the shares have more recently faded following a rally in the first half of the year, and are now down 34% from their peak over the summer.
Can Carnival return to its former glory? To answer that question, we asked a bull and a bear to weigh in on the stock. First let's hear the bull case.
Image source: Getty Images.
Still a long runway ahead
Jeremy Bowman: Carnival stock might still be stuck on the ocean floor, but the business has shown real signs of making a comeback. In fact, the company has seen record levels of demand in recent quarters.
In its third quarter, its peak summer season, revenue hit an all-time high at $6.9 billion, and the company said booking volumes remain significantly elevated. Customer deposits also reached a record at $6.3 billion.
Meanwhile, the stock has given up much of the initial gains of its post-pandemic rebound on fears that rising oil prices will weigh on its fourth-quarter performance and that the travel boom could start to fade.
Oil prices may be outside of the company's control, but management said that bookings are strong heading into 2024, and the company expects to deliver higher pricing as well, showing no evidence of a slowdown in demand.
The company still faces a heavy debt burden, but it's already made substantial progress, reducing its debt balance by nearly $4 billion, or more than 10% over the last two quarters. Meanwhile, it expects to deliver $4.1 billion-$4.2 billion in adjusted earnings before interest taxes depreciation, and amortization (EBITDA) this year, and free cash flow should top $2 billion, showing the business is now highly profitable, spinning off cash it can use to pay down its debt.
The stock is trading at a sharp discount to its pre-pandemic levels. Much of that difference may be deserved given the additional debt and share dilution during the pandemic, but the core business has never been stronger. In good times the cruise industry benefits from operating leverage, meaning profit margins rapidly expand. So there's plenty of upside potential if the company can continue delivering these kinds of results.
Mind the debt
Demetri Kalogeropolous: There's no doubt that Carnival is enjoying strong sales momentum in the wake of the pandemic. Bookings are up, and the company is having no trouble filling its vessels with guests these days.
But investors shouldn't let those wins distract from the significant risks involved with owning this stock. The cruise ship operator competes in a consumer discretionary industry, meaning it is highly exposed to a potential recession. Leisure travel is among the first budget items to take a hit when people are looking to save on expenses. As a result, investors can expect Carnival to suffer weaker earnings prospects related to any downturn.
Then there's the company's debt, which remains substantial at nearly $30 billion. That elevated debt promises to eat up earnings through interest charges, and it also limits management's flexibility in important ways. Carnival can't invest as aggressively into its business right now, or send cash directly to shareholders through stock buybacks or dividends. Instead, executives must prioritize paying down the debt they took on to survive the pandemic-driven pause on the cruise ship business.
Carnival's positive cash flow and strong booking trends imply that these financial pressures will ease over time. Yet, they are still likely to impact shareholders' returns for the foreseeable future.
