Cruise line Carnival (CCL -0.66%) saw its business upended by the social distancing efforts at the coronavirus pandemic's height. But those times are a memory today, with cruising back on track and customers lining up to get on board. In fact, Carnival posted record revenue in fiscal 2023.
So what should investors think about the stock now? The answer isn't as positive as you might think.
Carnival's business is back on track
To give credit where credit is due, Carnival's business has rebounded from the pandemic, when it was effectively forced to shut down its fleet of ships. In fiscal 2023, the company posted revenue of $21.6 billion, an all-time high.
Management declared that "the company entered 2024 with its best booked position on record, for both price and occupancy." To decode that last sentence just a little, Carnival entered fiscal 2024 with more customers scheduled to travel on its ships, and at higher prices than ever before.
This suggests that fiscal 2024 will be a solid year. In fact, the company expects adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to rise 30% over fiscal 2023 results. That's a pretty good outlook, so there's a reason for investors to be positive about Carnival's stock.
However, the stock has pulled back about 20% or so after hitting a peak in late 2023. While that still leaves the shares higher by around 30% over the past year, the stock trend isn't as positive as the business trends.
Opportunities and risks
If you just look at Carnival's recent customer trends and outlook, it seems like there might be an investment opportunity here. But it operates in an economically sensitive sector, since taking a vacation will take a back seat to putting food on the table for most people in the face of a weak economy.
While the United States managed to avoid a recession in 2023, there are subtle signs that consumers are feeling increasingly less robust. For example, retailer Dollar Tree has noted that it's seeing a lot more higher-income customers shopping in its low-price-point stores. And consumer staples companies like Campbell Soup have been highlighting buying trends that suggest customers are trying to stretch their budgets.
Meanwhile, financial giant Bank of America is projecting that the U.S. will end 2024 with a much higher unemployment rate than it had at the year's start. If these negative comments are a harbinger of what's to come, Carnival's business might already have hit a high water mark. There's a legitimate reason for caution here.
CCL Debt to Equity Ratio data by YCharts
Carnival's balance sheet is making the situation worse. Its debt-to-equity ratio of around 4.4 is drastically higher than it was prior to the pandemic. While it has started to reduce leverage, it hasn't been doing so as quickly as some peers. If there's a business slowdown, reducing leverage further will get harder, not easier.
The dramatic increase in leverage is likely one of the key reasons why Carnival's stock is still down around 70% from where it started out in 2020, before the pandemic.
Time to buy or time for caution?
There's still room for Carnival to rise relative to where it was prior to the pandemic. At the same time, the company isn't in the same financial shape as it was prior to 2020. And after a rebound over the past year, investor enthusiasm is starting to cool again of late -- perhaps for good reason, given the broader underlying trends among consumers.
Conservative investors probably won't be interested in the risk/reward balance here over the short or long term. Long-term investors who are willing to invest in turnaround situations might find the stock interesting. It's clearly past the worst of the pandemic hit. But a lot will depend on the balance sheet mending process, which has been relatively slow so far.
Over the short term, owning Carnival could be less than rewarding -- and that will be particularly true if customer demand cools off.
