The cruise industry faced unprecedented challenges during the height of the pandemic, prompted by widespread travel restrictions and safety concerns. As a result, revenue dried up, and stock prices sank across the industry.
Despite the significant drops from pre-pandemic highs, some investors see cruise stocks as potential bounceback candidates. One cruise stock, Carnival Corporation (CCL 8.01%) (CUK 7.72%), is up roughly 80% in 2023. Let's look at whether it is a temporary uptick, or if the performance signals a legitimate recovery for the cruise line operator.
Carnival's revenue is growing again
Revenue is the top line of the income statement because it is the first financial metric displayed, representing the money a company generates from its primary business before any deductions or expenses. Most companies expect their revenue to increase by at least the rate of inflation each year, or it might signal a fundamental problem with the business, potentially leading to reduced profitability.
NYSE: CCL
Key Data Points
In the case of Carnival, it wasn't necessarily a fundamental problem with the business that caused its revenue to crater; instead, it was a once-in-a-century pandemic.
For Carnival's fiscal 2019 (the full year prior to the pandemic), the cruise line operator generated $20.8 billion in revenue. That number took a nosedive to $5.6 billion for its fiscal 2020 before bottoming out to $1.9 billion for its fiscal 2021. Then, in Carnival's fiscal 2022, the turnaround story began. The company produced $12.2 billion in revenue as travel restrictions loosened.
Carnival has kept the momentum rolling during its fiscal 2023, generating $16.2 billion through its first three quarters. Notably, the company recently reached a new fiscal third-quarter record of $6.3 billion in customer deposits, surpassing its previous Q3 record of $4.9 billion in 2019.
Looking ahead, President and CEO Josh Weinstein recently said he is "pleased with [Carnival's] revenue trajectory heading into next year," as the company's bookings are "as far out as we've ever seen it."
Image source: Getty Images.
Carnival has a mountain of debt
Naturally, as Carnival's revenue disappeared during the height of the pandemic, the company was operating at a loss and needed to take on additional debt to stay afloat. As a result, the company's net debt (total debt minus cash and cash equivalents) skyrocketed from $11 billion at the end of its fiscal year 2019 to $28.5 billion as of its most recent quarter, or an increase of about 159%.
With rising interest rates, Carnival's debt is becoming expensive to service. Specifically, management expects Carnival to pay $1.9 billion in interest expenses for its fiscal year 2023. Additionally, management said it expects to end its fiscal 2023 year with less than $31 billion of debt, meaning Carnival's net debt could increase as much as $2.5 billion in its fiscal fourth quarter.
As a result of this massive debt, Carnival's credit rating isn't investment grade. This means future debt will likely be much more expensive, as it may need to find alternative ways to take out debt once its current loans come due. Management set a goal for the company to reach investment grade in 2026, but admits it "still [has] a ways to go."
CCL Net Financial Debt (Quarterly) data by YCharts
The state of the cruise operators
Carnival is in the crowded industry of cruise line stocks, so let's look at its competitors, Norwegian Cruise Line (NCLH 4.84%) and Royal Caribbean (RCL 6.99%), for a comparison.
First, looking at net debt, both competitors are better positioned than Carnival, with Norwegian's net debt recently coming in at $13.2 billion and Royal Caribbean's net debt at $19.4 billion. Royal Caribbean has been the most efficient at paying down its debt, with management reducing it by 11% from its highs.
Next, let's look at the valuation of each stock. The traditional price-to-earnings (P/E) ratio is a valuation metric that looks back at the trailing 12 months of earnings, which is a useful tool for comparing similar companies. Considering each of these companies just recently returned to profitability, the P/E ratio metric doesn't work. Instead, the price-to-sales (P/S) ratio offers a better comparison, given that people have returned to many pre-pandemic habits over the past 12 months. Royal Caribbean has the highest P/S ratio at 2.2, followed by Carnival at 0.9 and Norwegian at 0.8.
Put it all together, the market is currently favoring Royal Caribbean, likely due to its healthier balance sheet and demonstrating its ability to pay down a significant portion of debt.
| Carnival Corporation | Norwegian Cruise Line | Royal Caribbean | |
|---|---|---|---|
| Ships | 25 | 19 | 26 |
| Market capitalization | $19.1 billion | $6.2 billion | $27.2 billion |
| Net debt | $28.5 billion | $13.2 billion | $19.4 billion |
| Revenue (TTM) | $20 billion | $8.1 billion | $13.2 billion |
| Price-to-sales ratio | 0.9 | 0.8 | 2.2 |
| Net income (most recent quarter) | $1.1 billion | $346 million | $1.0 billion |
Data source: YCharts. Chart by author.
Is Carnival Cruise Lines a buy?
Despite Carnival stock's run-up in 2023, it is still down roughly 80% from its all-time high, and management is unlikely to reinstate its dividend anytime soon. While the cruise line operator shows signs of positive momentum with rising bookings and revenue, the looming challenge lies in its escalating debt, which will become progressively more costly to manage.
The company's journey back to prosperity might resemble turning around a cruise ship in a bathtub -- requiring time and encountering choppy waters along the way. With that in mind, Carnival investors should consider holding its stock for now.
