Cruise line stocks are in an interesting place at the end of 2023. On the one hand, demand is stronger than ever, as consumers are definitely back in "revenge travel" mode following the pandemic.
Yet, on the other hand, inflation and higher interest rates are a big counterweight to the bull case, as all major cruise companies are now loaded with debt -- a result of the emergency borrowing during the pandemic -- while also battling higher labor costs.
In 2023, investors in the largest cruise company in the world, Carnival Corp. (CCL -0.66%), apparently saw the good outweighing the bad, with the stock up a whopping 137% on the year in the wake of its recent fourth-quarter earnings report.
But will this year's surge run into a wall in 2024, or can Carnival stock continue grinding higher?
The fourth quarter comes in ahead of plan
Earlier this year, Carnival CEO Josh Weinstein unveiled a new three-year plan called SEA Change, which stands for Sustainability, EBITDA per available lower berth day (ALBD), and Adjusted return on invested capital (ROIC). Over the three years through 2026, management projects it will decrease carbon emissions by 20% relative to 2019, increase earnings before interest, taxes, depreciation, and amortization (EBITDA) per ALBD by 50% over 2023 and 25% over 2019 levels while achieving a 12% ROIC by that time.
From Carnival's fourth-quarter results and 2024 outlook, it seems like all is going according to plan -- in fact, Carnival's financial metrics are now slightly ahead of plan, according to management. In the just-reported fourth quarter, revenue surged 41% to $5.4 billion, $120 million ahead of expectations, while adjusted net losses per share of ($0.07) beat expectations of ($0.12).
Image source: The Motley Fool.
As you can see, even as ticket sales surged nearly 55% and onboard revenue, like excursions and drinks, surged just over 20%, cruise and tour operating expenses were actually slightly down.
That's a bit misleading, as there was a $433 million impairment charge in the year-ago quarter. However, absent that, cruise and tour operating expenses would have still been up only 12.3%. That's still far below the company's revenue growth, the result of increased occupancy even as Carnival raised prices.
For those wondering why the company still inked a slight net loss, a reversal from the third quarter's net profitability, the cruise industry is highly seasonal, usually peaking in the summer's third quarter. Comparing apples to apples, net losses improved by about $1.55 billion relative to the prior-year fourth quarter.
All in all, it was a good year. For all of 2023, Carnival's adjusted EBITDA improved dramatically to $4.23 billion from a ($1.68 billion) EBITDA loss in 2022, while adjusted free cash flow inflected higher to $2.15 billion from a ($3.47 billion) cash outflow last year. As a result of the stronger performance, Carnival was able to reduce its debt balance by $4.6 billion from the peak in the first quarter of 2023, leaving just over $30 billion in debt on the balance sheet.
2024 should bring even more improvement
With all management accomplished in 2023, investors may be wondering why the company is still inking full-year net losses in spite of record revenue. This is because while revenue has grown, inflationary costs have also risen by an even greater amount. Cruise costs per ALBD are now 12% higher than the same quarter in 2019, compared with net yields (or adjusted gross margin per ALBD) up just 7.8%. And, of course, the company has much higher interest payments than pre-pandemic due to its higher debt load.
But management also anticipates improvements to continue in 2024. The company just issued its 2024 guidance, anticipating an 8.5% increase in net yields but just a 4.5% increase in cruise costs per ALBD. With capacity set to also increase by 5.4%, management anticipates increased margins to yield a 30% increase in 2024 EBITDA to $5.4 billion. The past year's slight net loss is projected to improve to a positive $1.2 billion in net income, or $0.93 per share.
How cheap or expensive is Carnival?
Based on the company's forward guidance, Carnival shares trade at 20.6 times that forward EPS guidance. But given its massive debt load, it's probably best to look at Carnival on an enterprise value (EV)-based metric. In that light, shares trade at 9.5 times forward EV-EBITDA and a 17.7 EV/EBIT ratio.
Those ratios are about in line with the average during the 2014 to 2019 period. Although the current valuation is actually higher than the 2019 period, 2019 was actually a down year for cruise line stocks as the economy softened.
CCL EV to EBITDA data by YCharts
Thus, Carnival stock looks to be fairly valued around these levels. So, while Carnival stock can continue to gain in 2024, especially if inflation continues to abate, it probably won't match the extraordinary recovery of the past year.
