If you think that the stock market recovery for cruise line stocks has sailed away from you, look again. It's possible that you didn't miss the boat after all. Carnival Corp. (CCL -0.66%) and its smaller peers are profitable again, and back at pre-pandemic performance levels in some key metrics. However, cruise line stocks have pulled back sharply from their recent summertime highs.
Carnival is now trading 35% below its July peak. A lot is going right for the cruising giant with more 90 ships across its various fleets. There are also legit reasons for the market's near-term concerns even after Carnival posted record revenue in its latest quarter. Let's look at the bullish case as well as the bearish knocks to see if Carnival stock is a good buy right now.
You're gonna need a bigger boat
Carnival posted strong growth for its fiscal third quarter covering the busy summertime period ending in August. Revenue of $6.9 billion is an all-time high for Carnival, a better-than-expected 59% surge off admittedly depressed prior-year results. A 75% jump in ticket revenue -- accounting for two-thirds of its top-line results -- was only partially held back by a more modest 35% uptick in onboard revenue and everything else.
The news gets even better on the bottom line. Analysts were expecting a return to profitability after 14 straight quarterly losses. Its adjusted net income of $0.86 a share blasted through even the rosiest of Wall Street profit targets. It's the latest beat for Carnival, but once again you can see the widening gap between analyst projections and where the cruise line bellwether eventually lands.
| Quarter | EPS estimate | Actual | Surprise |
|---|---|---|---|
| Q4 2022 | ($0.87) | ($0.85) | 2% |
| Q1 2023 | ($0.60) | ($0.55) | 8% |
| Q2 2023 | ($0.34) | ($0.31) | 9% |
| Q3 2023 | $0.75 | $0.86 | 15% |
Data source: Yahoo! Finance.
The near-term future is promising, at least on the top line. Bookings are exceeding pre-pandemic levels, and its cruise ships are hitting 100% capacity again. It closed its latest period with a third-quarter record of $6.3 billion. As a global leader with recognized brands covering 85% of the worldwide market, Carnival is in a great position to cash in on the end of international travel restrictions.
Carnival spent nearly four years in the red, but now that it's profitable there's no looking back. Carnival is trading for less than 14 times forward earnings. It's not just Carnival's entry-level cruises that are cheap.
Image source: Getty Images.
Know where the lifeboats are
There are some near-term challenges. Fuel costs remain stubborn, even as Carnival is turning its attention to liquefied natural gas as an alternative energy source. Recent geopolitical unrest in Ukraine, Israel, and other percolating countries may find folks second-guessing decisions to head on long cruise vacations.
It's also worth noting that Carnival's earnings on a per-share basis remain well below its pre-COVID-19 high-water marks. Carnival had to take on a lot of debt and issue new shares to keep the business going during the industry's pronounced lull, and that will weigh down per-share profits in today's high-rate environment.
The good news is that Carnival is a money-making machine these days. It has paid off almost $4 billion of its debt since its leverage peaked earlier this year. There's more debt and a bloated share count to keep repurchasing, but the cruise line stock is confident about its ability to navigate the current waters. In a CNBC interview two weeks ago, CEO Josh Weinstein said he expects Carnival's credit rating to be back to investment grade by 2026. Now that we're ankle deep into fiscal 2024 it's fair to turn to fiscal 2025 with the stock going for less than 10 times that fiscal year's projected earnings. There are so many ways that the cruising industry can get derailed, but if Carnival's able to keep executing in the right direction it should beat the market from here.
