Carnival (CCL -0.66%) has had a banner year. With just a few weeks left in 2023, shares of the one-time meme superstar are up 127%. It's a much-awaited turnaround for the pandemic-plagued cruise line, and it might not be over. Despite the current market enthusiasm, investors may not realize that Carnival stock is actually still down 74% from highs it reached in 2018. There were clearly some headwinds prior to the pandemic, and closures at the beginning only exacerbated them.
Can Carnival get back to growth and surpass its previous high? Let's see if the stock is worth buying now.
Where Carnival is holding now
Carnival's business has completed its rebound from the pandemic. Sales have surpassed pre-pandemic levels, and net income is very close.
CCL Net Income (Quarterly) data by YCharts
There are plenty of signs pointing to continued momentum. Occupancy was 109% in fiscal 2023's third quarter (ended Aug. 31), deposits reached a third-quarter high of $6.3 billion, and bookings were also at a third-quarter high. Management said it's been working to extend its booking curve, and that its 2024 bookings are the furthest out its ever had and at high prices. It has low remaining capacity, allowing it to flex its pricing power for the remainder.
The North American lines are exceeding pre-pandemic levels, but the Europe-based business is meeting historical levels. Although total revenue has already recovered, there's still more room for recovery on the European side.
Carnival had felt a negative impact from gasoline prices in the third quarter, but fuel prices are declining, which should boost profitability. Management said it's investing in fuel-reduction efforts, and fuel consumption per available lower berth days, a standard cruise capacity measurement, is down 16% from 2019 levels.
The main fallout: Increased debt
Carnival is back in business, but it still has a large debt weighing on its balance sheet. That debt ballooned when Carnival raised capital to survive and wasn't taking in any revenue for several months. The company has shrunk the total amount by about 10% from its highs of nearly $4 billion, and it's expecting to end the year with $31 billion, or down $10 billion from highs.
CCL Cash from Operations (Quarterly) data by YCharts
Management said it would pay off the debt with cash from operations, which was $1.8 billion in the third quarter and has been growing at close to pre-pandemic levels. Still, there's some risk associated with carrying that debt, leaving little room for error.
Is Carnival stock a bargain?
At the current price, Carnival stock trades at a forward one-year price-to-earnings ratio of less than 14. When you have a cheap valuation, the question that has to be asked is whether it's a bargain or a value trap. Cheap stocks are no bargain if there's no future opportunity or if the risk is too high.
Carnival is doing a great job of rebuilding and generating higher revenue, earnings, and cash flow. It's paying down its debt, and this is the largest cruise operator in the world with a history of excellent performance. With operations back in full swing, the risk looks low. That's why I see Carnival stock as a bargain at this price. For all these reasons, I recommend Carnival stock as a buy right now.
