Investors ended 2023 in a jubilant mood. Equity markets recovered nicely, with the S&P 500 gaining better than 24% after losing more than 19% in 2022.
Shareholders of Carnival (CCL -0.66%) enjoyed a much better performance. Its stock price gains dwarfed the overall market, rising by 130%. That does present a dilemma for current and prospective investors, however.
Does Carnival's stock still represent a buying opportunity, or are there better opportunities elsewhere for long-term investors?
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Sailing the seas again
During the trying times of the pandemic's early days, Carnival's revenue was decimated. People stayed home, and they especially avoided going on cruise ships, with their close quarters.
In the fiscal year ended on Nov. 30, 2019, revenue was $20.8 billion. It declined precipitously over the next two years to just $1.9 billion in fiscal 2021. During this span, Carnival swung from a $3 billion profit to a $9.5 billion loss.
People have now grown more comfortable traveling, however. An April 2023 Bank of America report, based on its internal data, showed spending on cruises was 6.1% of travel expenses in the first quarter of 2023, up from 4.5% in 2022.
And that good news seemed to last through 2023. In Carnival's latest quarter, occupancy was more than 101%. Its fiscal 2023 revenue increased by 77.5% to $21.6 billion, an all-time high.
But the company reported a $74 million loss last year. Its adjusted net income, which excludes certain items such as profits and losses from ship sales, was just $1 million, although it lost $5.5 billion a year ago on this basis.
A look ahead
The company has operating momentum. Booking volume in the fourth quarter was higher than the pre-pandemic 2019 level. At the end of December, it had two-thirds of its space filled at higher prices than last year.
But beyond the short term, it could face a challenging environment. The economy avoided the widely anticipated recession last year, but many economists still call for slower growth this year in a "soft landing" scenario.
Carnival offers cruises ranging from shorter voyages and more-casual experiences to a longer, luxury atmosphere, but it will undoubtedly see its results affected should the economy falter. After all, it's difficult for people to go on a vacation if they have lost a job, or fear losing it.
Valuation
Carnival's tremendous share-price gain last year has made it more expensive, sending its price-to-sales (P/S) ratio from about 0.8 at the end of 2022 to over 1. By comparison, Royal Caribbean Cruises has a P/S of 2.5, in line with the S&P 500's 2.6 multiple.
But Royal Caribbean, unlike Carnival, has turned profitable. For the nine-month period ending Sept. 30, 2023, its adjusted net income was $1.5 billion compared to a $1.6 billion loss in the year-ago period. Hence, the richer valuation makes sense.
Carnival's stock might have gotten ahead of itself with last year's outsize gain. With a lack of profitability and a potentially slowing economy, the share price might be due for a correction. If you own the stock, it seems like a good opportunity to sell.
