It's been a rough past three months for Carnival (CCL -0.66%) shareholders, and understandably so. Between lingering inflation, geopolitical tensions in and around the Middle East, and a slowdown in so-called (post-pandemic) revenge spending, investors have reason to doubt the company's prospects. That's why the stock's down 38% from its July peak.
You might want to use this sell-off as an entry point into long-term positions, though. While more volatility is likely in store, the dip doesn't reflect the maritime cruise company's arguable underlying long-term value.
See the bigger picture
There are some bears who might dispute this claim -- and their arguments are reasonable. Inflation has remained uncomfortably high for too long now, driving interest rates up to equally uncomfortable levels. Travel warnings are ramping up at the same time people seem to have proverbially scratched their itch to travel after the coronavirus contagion kept them cooped up for a couple of years.
As hockey great Wayne Gretzky said of his success, however: "I skate to where the puck is going to be, not where it has been." For investors, that just means focusing on the future rather than the past. Despite plenty of troubling headlines right now, Carnival's future remains brighter than the stock's recent rout suggests.
Take the Federal Reserve's near-term and long-term economic growth outlook as an example. Late last month, the central bank's Federal Open Market Committee upped its outlook for the United States' 2023 gross domestic product (GDP) growth rate, and simultaneously raised its economic growth expectations for next year and 2025. Although it's likely to remain below 2% through 2026, that's still enough growth to keep the country's unemployment rate under 4.5% for that timeframe.
Meanwhile, people aren't exactly cinching their purse strings tight. The U.S. Census Bureau reports September's retail spending was up 3.8% year over year, led by a 9.2% uptick in spending at restaurants and bars.
Consumerism is alive and well in other parts of the world too. China's retail spending grew 5.5% year over year last month, accelerating for a second month in a row. The International Monetary Fund estimates that the tourism-oriented portions of the Caribbean will experience GDP growth of 3.2% next year followed by 2.3% growth in 2024, adding to 2023's economic growth of 9%. Even struggling Europe is expected to hammer out a bit of economic and tourism-specific growth next year.
All of this bodes well for Carnival, which offers would-be travelers an affordable way to travel to other parts of the world.
But the wars in Ukraine and now Israel? They are matters to be mindful of, to be sure. Such conflicts are nothing new, however. Most of them taper off rather than escalating into something even more widespread.
Carnival is capitalizing on its opportunity
Analysts remain optimistic as well. Although Carnival stock is falling, the analyst community isn't flinching. Most of them still consider it a strong buy, and their consensus price target of $17.08 is 46% above the stock's recent price.
That's bullishness largely rooted in revenue and earnings growth -- past and projected. It's not a mere recovery of business that was lost during and due to the pandemic, either. This year's expected top line of $21.5 billion will be record-breaking, if achieved, and while next year's projected swing to a per-share profit of $0.92 won't set records, it's impressive progress all the same.
Data source: StockAnalysis.com. Chart by author.
There's every reason to believe Carnival will produce these expected results.
Case(s) in point: During its fiscal third quarter ending in August, customer deposits reached a Q3 record of $6.3 billion, while occupancy rates continue to top 100%. Bookings are coming in about 20% higher than 2019's pre-pandemic levels as well. This degree of demand even suggests Carnival has some room to raise prices, offsetting the recent rise in the cost of fuel.
Doubters may also want to bear in mind that while the company borrowed heavily to remain afloat during the COVID-19 pandemic, it's managing this debt. Long-term debt levels were dialed back from $31.9 billion a year ago to $29.5 billion as of August. It's not massive progress, but it's progress to build on.
Figure out how to ignore the noise
There are risks. Namely, Carnival stock remains highly sensitive to headlines. If the news seems like it could be problematic for the maritime cruise business, investors will treat it like it's going to be problematic for Carnival. Owning a piece of this company right now isn't for the faint of heart.
If you can stomach the volatility -- and if you can distinguish the difference between short-term noise and long-term opportunity -- Carnival's stock is arguably undervalued following its big pullback from July's high.
The big challenge in owning this name for the foreseeable future will just be not flinching at news headlines that sound and seem troubling.
