After facing an existential threat during the pandemic, which forced much of the travel industry to halt operations and raise significant capital to stay afloat, Carnival Cruise Lines (CCL -0.66%) is seeing new signs of life. And investors are starting to take notice of this once-struggling enterprise.
This top cruise line stock has crushed the broad market in 2023, rising 104% (as of Dec. 5). In November alone, shareholders were rewarded with a 31% gain.
Optimism surrounding the company is certainly increasing, so is Carnival a buy, sell, or hold right now?
Recent developments
It's no surprise the coronavirus pandemic caused demand for cruise travel to fall off a cliff. In fiscal 2020 and 2021, Carnival's sales tanked 73% and 66%, respectively. With revenue down more than 90% from pre-pandemic levels, many observers wondered if things would ever pick back up for the company (and cruise industry overall).
Fortunately, it's been a steady improvement for Carnival since hitting those lows. Revenue jumped 538% in fiscal 2022. Through the first nine months of fiscal 2023, sales roughly doubled. In fact, in the most recent quarter (ended Aug. 31), Carnival registered record revenue of $6.9 billion with a Q3 record of $6.3 billion in customer deposits.
"We are maintaining strong momentum and continuing to build demand through our improved commercial execution," CEO Josh Weinstein said about the performance. Carnival appears to have largely recovered from the pandemic.
It's also very encouraging the business is exhibiting pricing power. "We are well positioned to drive 2024 pricing higher with less inventory remaining to sell than the same time last year, despite a capacity increase of 5%," CFO David Bernstein mentioned on the latest earnings call.
Consumers are clearly very interested in booking cruise trips again. This is all the more impressive, given the overall macroeconomic backdrop. You'd think that inflationary pressures and rising interest rates over the past couple years would discourage such spending, but this just hasn't been the case with travel.
Investor mindset
Given those latest developments, it's not difficult to find reasons to buy or hold the stock.
And as sales keep climbing, profitability is improving. Carnival's $1.6 billion of operating income last quarter was a stark reversal from the operating loss of $279 million in the year-ago period.
Plus, the stock still looks cheap, even after its huge rise in 2023. Shares currently trade at a price-to-sales multiple of 1.1. In the decade that ended Dec. 31, 2019, prior to the onset of the pandemic, Carnival stock sold at an average P/S ratio of 2.1, so there is certainly valuation upside should the market's view of the business normalize.
However, I'm passing on the stock right now, despite these favorable qualities.
One of the most obvious reasons why is because of cyclicity. In difficult economic times like recessions, consumers tend to cut back on discretionary purchases, a category that cruise trips definitely fall under. Though Carnival has bucked that trend recently thanks to pent-up travel demand following the pandemic lockdowns and restrictions, the company will still be reliant long term on robust economic conditions for its success.
The company's massive debt burden, currently at $31 billion, also raises concerns. That figure is about 40% higher than Carnival's market cap. Management is focused on reducing this balance, but this could be a new normal in the industry.
Overall, I view this business as too risky to own.
