With its shares up by a whopping 127% this year, Carnival Corp. (CCL -0.66%) is no doubt making a lot of shareholders happy. But while the international cruise operator has made great strides since the depths of the pandemic, it is still far from reaching safe waters. That's because while growth and profitability are improving, management of its huge debt load remains an uphill battle.
Let's explore what's ahead for the cruise line and whether it has a chance to navigate to a better place next year.
An impressive operational rebound
The COVID-19 pandemic hit few industries harder than ocean cruising -- particularly after a no-sail order by the Centers for Disease Control and Prevention (CDC) grounded U.S. operations for much of 2020 and 2021. That said, Carnival's third-quarter earnings demonstrate how far the company has recovered from this challenging period.
Q3 revenue hit an all-time high of $6.9 billion amid soaring passenger ticket and onboard sales (food, drinks, and entertainment on the cruise ships). To put this number in context, Carnival generated just $6.5 billion in the third quarter of 2019, before the pandemic. And the company has finally returned to profitability under generally accepted accounting principles (GAAP) with $1.07 billion in net income.
Although profits are 41% lower than the $1.8 billion generated this time in 2019, this is still an important milestone in Carnival's turnaround. Net income and, perhaps more importantly, operating income mean the cruise operator will be less reliant on outside sources of cash like debt or equity dilution to fund its operations and pay down its debt.
What comes next in 2024?
But Carnival's long-term situation isn't all champagne and caviar. Going into 2024, the company still has a big problem with its balance sheet. As of the third quarter, long-term debt stands at $29.5 billion, which is uncomfortably high for a company with a market capitalization of just $24 billion. And even though Carnival is profitable now, it still has substantial cash outflows related to debt servicing and capital expenditure.
Image source: Getty Images.
Third-quarter interest expense stood at over $500 million and will likely exceed $2 billion annually. An additional $2 billion in debt will mature in 2024. And Carnival expects to spend $4.1 billion on capital expenditures related to building new vessels and maintaining its aging fleet. The newfound profitability will help it manage these obligations. But there probably won't be much cash left over for investors in 2024 and beyond -- until management finally begins to extinguish the debt burden.
Looking closer at the valuation
With a forward price-to-sales (P/S) multiple of about 1.1, Carnival stock is cheaper than the S&P 500 average of 2.5. But this metric only tells one side of the story. When you buy shares in a company, you also get exposure to its debt. And in Carnival's case, this will be an ongoing drag on its cash flow and the amount of value left over for shareholders.
When taking Carnival's balance sheet into account with a metric called enterprise value (which adds market cap to debt minus cash), Carnival's P/S multiple more than doubles to 2.7. And this looks like a high price to pay for a stock that is still in recovery mode.
