The "revenge travel" trend, which involves going on vacations that were postponed as a result of the pandemic, appears to be coming to an end, according to travel data. That means there could be a slow down in discretionary travel next year. And that's one reason why investors may be feeling less bullish about Carnival Corp (CCL +0.21%) these days. The travel stock has been struggling of late -- it's down 24% in the past three months.
But here's why I wouldn't worry about the cruise line operator, even if there is a slow down in leisure travel.
It caters to an older demographic
The target market for cruise ships isn't the same as it would be for an airline. People who go on cruises are generally older, and that can mean more disposable income. According to industry statistics, the average age of a cruise tourist is 46.5 years. And one-third of demand comes from people who are 60 and older.
While there has been growing interest among younger travelers, the core demographic is an older one, and that can benefit a travel company such as Carnival, as that means its travelers may not be as vulnerable to a recession as the general population will be.
NYSE: CCL
Key Data Points
Bookings are made well in advance
There's a great deal of predictability in the company's bookings. Carnival says that approximately half of its demand is booked up 12 months in advance. This improves Carnival's ability to forecast its revenue well in advance with a good degree of confidence. Plus it gives the company plenty of time to make adjustments to its strategy in order to adapt to any changes in demand.
Although that doesn't eliminate the risk entirely, it can allow Carnival to plan ahead and lessen the risk of a big surprise for investors. And there's no sign of concern right now, as the company says that its advanced bookings for next year are stronger than they were last year. It also says that its bookings are further out than ever before.
The company has some renewed pricing power
Right now, Carnival is in a great position -- its supply is filling up even as it has been adding capacity. The company is looking at next year and believes it can increase its already-elevated prices higher as a result of the strong demand. And should that change, it would have room to reduce prices to lure in more travelers.
Lowering prices is not a lever it has to pull on today, but Carnival is in a good position knowing that its prices and demand are currently strong enough to achieve profitability. In the company's most recent earnings report for the period that ended on Aug. 31, Carnival's operating profit topped $1.6 billion, versus a loss of $279 million last year.
With much more breathing room than in the past, Carnival can better weather the storm should demand slow down. But as of now, it's shaping up to be a strong year for the company in 2024.
Should you buy Carnival stock?
It's been a bounce-back year for Carnival. Its shares are up around 60% in 2023 after falling by a similar amount last year. The company's profitable operations mean Carnival should have room to pay down its long-term debt (which totals $29 billion, but is down by more than $2 billion from six months ago), and there's less of a risk of dilution ahead.
At six times its trailing earnings, the stock looks like a potential bargain. Investors appear to be concerned about a downturn in the economy and slowing travel demand. But with potentially a more resilient business than other travel companies, Carnival could be a better buy than other travel stocks. With a low valuation and some strong results and encouraging bookings, Carnival is a great buy today.
