Since investing is forward-thinking, it's important to consider where a stock is going to be in the future before putting down any money. Even if a company is reporting sales growth right now, can you be reasonably confident it can continue for the foreseeable future?
Carnival Corporation (CCL -0.66%) is the leading global cruise company, and it's had an interesting few years, to say the least. After plummeting during the pandemic, the stock gained 130% in 2023. Let's see where it could go over the next three years.
Back in business
Carnival is literally back in business after closing down cruises during the height of COVID-19, and business is booming. Revenue is hitting all-time highs, and demand is still robust.
Revenue for its fiscal 2023 (ended Nov. 30) hit a record $21.6 billion, and two-thirds of occupancy is already booked out for 2024. That's Carnival's best booked position ever. Booking volume in the fourth quarter was elevated as compared with pre-pandemic levels, indicating that demand isn't slowing down. These bookings are also at higher prices, which is adding to increased revenue and bulking up profits.
Demand is likely to moderate at some point over the next three years, but bookings remain elevated in the near term. Even when they eventually taper off, they should moderate at historical trends, which is where investors want to see them.
Although profitability is not yet at pre-pandemic levels, it's getting closer. Carnival booked a net profit for the 2023 third fiscal quarter of $1 billion, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) continues to improve. Early bookings at high prices are sending more dollars down to the bottom line. Management is guiding for adjusted EBITDA of $5.6 billion in 2024, or a 30% increase year over year.
The pesky debt issue
Everything up until this point demonstrates that Carnival is rebounding and achieving its goals. It has robust demand that should generate further revenue over the next three years, and higher sales are trickling down to profitability.
So what's the catch? Carnival took on an enormous debt to stay solvent when there weren't any sales coming in, and it's now saddled with that debt. It has been making a point of explaining how it's paying it down, and that it paid off $6 billion in 2023. It's now $4.6 billion off of its peak. Management says that it will use adjusted free cash flow to keep paying that off. Carnival generated $4.3 billion in cash from operations and $2.1 billion in adjusted free cash flow in 2023.
It's coming into the new year with around $30 billion in long-term debt, or about $20 billion more than pre-pandemic levels. In three years, if it pays off similar amounts, it will be very close to those levels. How much does this matter? If everything moves along smoothly, probably not much. The risk is in anything unusual happening. With this much debt, Carnival doesn't have a lot of wiggle room to make mistakes.
So the question is, how likely is it that there will be another catastrophe over the next three years to throw it off course? There isn't likely to be another worldwide pandemic and ensuing lockdown, but even factors like management changes or new competition could add volatility to the mix. Considering how well Carnival is getting back to growth, with efficient operations and careful debt repayments, the likelihood of the debt playing a large role in its recovery seems small.
Three years from now, Carnival should be growing and profitable at historical levels with a much lower debt load, and it should continue to be a market-beating stock for the next three years and longer. However, it may not be the right stock for the highly risk-averse investor.
