Perhaps no industry suffered more during the pandemic than the cruise industry. Due to lockdowns, cruise lines had to shut down for more than a year, leaving some investors to question the industry's ability to survive.
Indeed, Carnival (CCL 0.87%) had to take on massive debt to stay in business, as its debt ballooned from just over $12 billion in fiscal 2019 to nearly $36 billion by the end of fiscal 2022.
However, its dramatic recovery from the pandemic has forced me to change my negative outlook on Carnival stock. Here's why.
Carnival's recovery
Admittedly, Carnival stock had looked uninvestable for years. The company earned little revenue for several quarters. Even when cruises resumed in mid-2021, it took months for the company to rebuild the customer base to the point where all its ships could sail again.
As a result, Carnival endured years of losses. In fiscal 2022, well after it had returned to the seas, it lost more than $6 billion, which was not much of an improvement from the $9.5 billion loss in fiscal 2021, when it did not sail for half of the year. Also, in fiscal 2023 (ended Nov. 30, 2023), the company still lost $74 million.
But despite a $48 million loss in fiscal Q4, its nearly $1.1 billion in net income in fiscal Q3 (ended Aug. 31, 2023) showed it can again be a profitable company. With that, Carnival has moved ahead of its three-year financial targets, and analysts forecast a return to profitability in fiscal 2024.
Moreover, bookings are at record highs. Also, by the end of fiscal Q4, it had already booked two-thirds of its cabins for fiscal 2024. And since the company has booked those cabins at considerably higher prices, this should boost its financials. Further improvement should come as it plans to increase its capacity by more than 5% in fiscal 2024.
How the improvements help Carnival stock
Amid better conditions, Carnival stock has risen by more than 30% over the last year. That was enough of a gain to outperform the S&P 500 over the previous year.
NYSE: CCL
Key Data Points
Despite that increase, its valuation has not reflected these gains. Carnival stock recently traded at a forward P/E ratio of just 16. Additionally, consensus earnings per share forecasts point to a 36% increase in net income in fiscal 2025. This will put further downward pressure on the earnings multiple, which will likely lead to a higher stock price.
But what about the debt?
Admittedly, the debt was the primary reason I was previously bearish on Carnival. With just over $31 billion in debt, it represents a tremendous burden, given the book value of $6.9 billion.
However, Carnival's success seems to make its massive debts less of a concern. During fiscal 2023, it made $6 billion in debt payments, cutting total debt by $4.6 billion. Such reductions enable Carnival to retire debt as it comes due, reducing or possibly eliminating the need to issue new debt at today's higher interest rates.
Moreover, Carnival expects material cash requirements to amount to $6.3 billion in fiscal 2024. About $3.9 billion of that pertains to debt, with the remainder devoted to capital expenditures. Since that exceeds the amount of debt due in 2024, the health of Carnival's balance sheet should improve if 2023's performance is any indication.
Furthermore, the company retired that debt while adding capacity to meet rising demand. That will likely bring the growth needed to draw more investors into Carnival stock.
Consider Carnival stock
Considering record bookings and improved financials, it is likely time to turn bullish on Carnival stock. Thanks to its recovery and moves to add capacity, the cruise line stock is on track to not only turn profitable for the year but also reduce its considerable debt burden.
Additionally, with its low forward P/E ratio, the stock price does not seem to reflect its improving outlook. Thus, investors may want to add positions before more investors notice that Carnival now is sailing in smoother waters.
