Carnival (CCL +4.02%)(CUK +4.16%) stock made an unbelievable comeback last year, gaining 130% after falling to lows when cruises were on hold. However, it's still 70% off its highs from before the pandemic. There's still plenty of room to move up, and 2024 might be the best time to buy. Here's why.
High risk comes with high rewards
Buying Carnival shares over the past few years came with a lot of risk. It had no revenue and was taking on huge debt. On the positive side, it was -- and still is -- the largest cruise operator in the world with a history of growth. However, there was no way to know if and when it would bounce back. That could tie up an investor's money at the very least in the short term and, at worst, create total losses.
Risk-tolerant investors had a better chance of seeing gains if they bought as the recovery began to take shape. It's now almost complete. In the 2023 fiscal year (ended Nov. 30), revenue hit an all-time high of $21.6 billion, and it generated $2.1 billion in adjusted free cash flow. Customer deposits reached a fourth-quarter record of $6.4 billion, and Carnival came into the new year with its best position ever for both occupancy and ticket price. It's also front-loaded for the year, with two-thirds occupancy for 2024, sold at higher ticket prices.
But it's not the best strategy for most investors
If you bought at the right time, you've been handsomely rewarded. But trying to time the market is almost always a losing strategy. Successful investing, for most people, involves finding quality stocks trading at reasonable valuations that fit their risk profile. When the risk level becomes too high, buying is more akin to betting.
Carnival stock may not gain 130% this year, but it's a better time to buy than last year because the risk level is much lower now, but there's still plenty of growth potential.
Management said that net yields in the 2023 fourth quarter, a cruise profit metric, were higher than in 2019, which was itself a strong year, and were higher than expected. That led to earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise 5% per unit from 2019 levels despite interim inflation.
Carnival is already ahead of schedule to meet goals for its three-year growth strategy, and it anticipates another year of record revenue and adjusted EBITDA in 2024. It's guiding for adjusted EBITDA to increase 30% over last year in fiscal 2024, net yields to increase 8.5%, and occupancy to return to historical levels.
NYSE: CCL
Key Data Points
Where it stands today, Carnival is an industry leader with capable management demonstrating a strong commitment to recovery and shareholder value. It should provide years of steady gains as it generates higher revenue and reports improved profits, and its stock makes up lost value and then goes higher.
Is Carnival still risky?
That doesn't mean the risk has completely disappeared, but it may be a level of risk worth taking for the average investor with a long-term horizon.
The main risk now lies in its debt repayment. Carnival has paid off about $5 billion from its peak debt, a position $3 billion better than it originally planned for. It has plans to pay off the rest with adjusted free cash flow. But it doesn't have a lot of wiggle room here. The good news is that a global pandemic shutting it down isn't likely to happen again soon, but that doesn't mean there aren't other crises that could set off problems.
The risk as compared with opportunity looks low right now, however, and Carnival could be an excellent value stock to add to your portfolio.
