Shares of Carnival (CCL -0.66%) (CUK -0.88%) are losing steam this year. The cruise company has made a real comeback, and investors no longer see it as a big story. It's now just a regular, slow-growth company trying to generate higher demand, but carrying a huge new load of debt.
But is that all there is left to Carnival's story? The stock is up 37% this year, still outpacing the S&P 500, but it's down 38% over the past three months. Does that spell opportunity? Here's what to look for if you're considering buying Carnival stock.
1. Can it surpass record demand?
Part of what made Carnival an exciting stock to invest in as it made its recovery is the incredible opportunity to return to revenue growth. After it completely stalled when there were no operations, the assumption was that it would be able to return to making money at pre-pandemic levels.
The stock price actually moved in contrast to revenue growth: As revenue went to zero, the stock soared, and now that it's back to normal, the stock is falling. That might be due to its previous meme status and retail investors working toward a short squeeze, or simply risk-loving investors betting on a return to growth.
Either way, now that the business rebound has happened, the stock is moving back down. I've warned in the past that this could happen since it's not going to be able to match the incredible revenue growth that comes along with a recovery. However, is it necessary to say that growth is over?
Management is saying the opposite. In what might be the most important piece of the third-quarter earnings report, CEO Josh Weinstein said, "We see no signs of slowing from our consumers."
While other travel companies have seen steep deceleration in sales growth, and some airlines are struggling to fill seats, Carnival's advanced bookings are elevated, and customer deposits reached a third-quarter record of $6.3 billion. Carnival increased capacity by 5% and has seen its 2024 bookings swell, moving further out than previous booking times.
It's also raising prices as demand remains strong, leading to higher earnings before interest, taxes, depreciation, and amortization, and a return to profitability (EBITDA) despite increased fuel prices. If you are following Carnival's story, demand is an important metric to watch.
2. Can it pay down its debt?
The other piece that's seriously affecting investor enthusiasm is the high debt that Carnival took on when it wasn't bringing in revenue. Management is carefully dealing with it, wiping out another $2.4 billion in debt in the third quarter, and is now $4 billion down from the high.
As part of that effort, it called in $1.2 billion of its highest-cost debt and prepaid another $1.1 billion, saving the company some $300 million in interest expense.
But while celebrating wins, it's important not to overlook the remaining risk. Carnival still has $31 billion of debt to wipe out, and it's relying on continued strong demand to make that happen. Before the pandemic, it kept around $10 billion in debt on its books at any given time, so it needs to pay off about $20 billion to get back to balance.
CCL total long-term debt (quarterly) data by YCharts.
At the current rate, it should take several years. That means it's in a fairly precarious position for the time being, and slowing demand and sales, or other significant challenges, could hurt financial performance.
Carnival stock isn't risk-free
It's important to watch these two issues, as well as the general trajectory of company performance. The recent stock drop is a hazard of short-term investing.
Carnival has plenty of long-term potential. Before the pandemic, it demonstrated robust sales and profit growth and cash-flow generation, and the stock outperformed the market for years. Management is doing an excellent job of creating and meeting demand, paying off debt, and making its shares more valuable.
At the current price, shares are trading at only 0.7 times trailing-12-month sales, just as Carnival is becoming profitable, and without dampening demand. I won't say this is risk-free, but it looks like an opportunity for patient investors with a long-term horizon.
