Prior to the pandemic, Costco (COST 1.01%) and Carnival (CCL -0.66%) were both considered resilient blue chip stocks for long-term investors. Costco's warehouse stores generated steady sales growth through economic downturns, and it locked in its shoppers with sticky subscription plans. Carnival, one of the world's largest cruise ship operators, also generated stable sales from a diverse range of travelers and easily bounced back from multiple recessions.
However, the pandemic generated strong tailwinds for Costco while nearly sinking Carnival with severe headwinds. Costco's revenue and profits rose as shoppers stocked up more groceries and household products throughout the crisis. But Carnival's sales plummeted, and it turned unprofitable as global travel ground to a halt.
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That's why Costco's stock has rallied about 230% over the past five years, while Carnival's stock has declined by roughly 70%. Costco has clearly been the better investment, but will it continue to outperform Carnival over the next few years?
Costco's positive growth cycle continues
Costco's long-term growth is driven by three main strategies: Opening new warehouse stores, gaining new members, and maintaining its high renewal rates. That positive cycle enables it to subsidize its lower-margin product sales with its higher-margin membership revenues. That's why Costco can sell its products at such low prices.
From fiscal 2018 to fiscal 2023 (which ended last September), Costco's revenue grew at a compound annual growth rate (CAGR) of 11% as its earnings per share (EPS) rose at a CAGR of 15%. It ended the first quarter of fiscal 2024 with 129.5 million cardholders and 871 warehouses worldwide, compared to 94.3 million cardholders and 762 warehouses at the end of fiscal 2018.
Its worldwide renewal rate increased from 87.9% at the end of fiscal 2018 to 90.5% in the first quarter of 2024. That steady expansion suggests Costco is an evergreen business -- and it's well-insulated from inflation because higher prices usually drive cost-conscious people to make bigger bulk purchases at its stores.
From fiscal 2023 to fiscal 2026, analysts expect Costco's revenue to rise at a CAGR of 6% and for its EPS to increase at a CAGR of 9%. That marks a slowdown from its previous five years -- which included its acceleration during the pandemic's height -- and its stock isn't cheap at 45 times forward earnings. The bulls believe Costco's strengths justify its premium valuation, but the bears believe the flight to safe haven stocks inflated its multiples to unreasonable levels over the past few years.
Carnival's business is gradually recovering
From fiscal 2018 to fiscal 2023 (which ended last November), Carnival's revenue grew at a CAGR of less than 1%. That growth seems anemic, but it bounced back from two consecutive years of double-digit declines in fiscal 2020 and fiscal 2021.
After the worst of the pandemic passed, Carnival's revenue surged 538% in fiscal 2022, with its total passengers carried rising 542% and its occupancy percentage improving from 56% to 75%. In fiscal 2023, its revenue rose 77% to $21.6 billion -- which finally surpassed its pre-pandemic revenue in fiscal 2019 -- as it carried 62% more passengers and finally achieved an occupancy percentage of 100%. Analysts expect its revenue to continue rising at a CAGR of 7% from fiscal 2023 to fiscal 2026.
That recovery seems promising, but Carnival turned unprofitable over the past three years and took on a lot of debt to stay solvent during the pandemic. Between fiscal 2018 and fiscal 2023, its long-term debt more than tripled from $7.9 billion to $28.5 billion -- which was nearly 12 times higher than its $2.4 billion in cash and equivalents at the end of the year. In comparison, Costco ended its latest quarter with $17 billion in cash and equivalents and just $5.9 billion in long-term debt.
On the bright side, Carnival is gradually reducing that mountain of debt and doesn't expect to face any major debt maturities until well after 2025. Analysts also expect it to turn profitable again in fiscal 2024 and grow its EPS at a CAGR of 30% through fiscal 2026. Based on those estimates, Carnival's stock looks cheap at 17 times forward earnings -- but it might remain out of favor until it turns profitable and significantly reduces its leverage.
The better buy: Costco
Costco's stock isn't cheap, but it's a high-quality stock that deserves a higher price tag. Carnival is a decent play for value-minded investors, but its high debt load will make it an unattractive investment as long as interest rates stay elevated. Therefore, I believe Costco will continue to outperform Carnival for the foreseeable future.
