Carnival (CCL +0.29%)(CUK 0.21%) made a huge comeback last year, and its stock reflected that, closing out 2023 with a 130% gain.
That gain hasn't continued into 2024. Carnival stock dipped 20% this year. But this is all short-term. If you buy Carnival stock, you should be thinking about the long term. Where could Carnival stock be in 10 years?
As far as Carnival's concerned, it's passed the pandemic
So much of Carnival's fortunes over the past four years have been dictated by trends related to the pandemic. But revenue hit an all-time high in 2023, and Carnival finally reported a quarterly net profit. Its stock reacted in kind, and Carnival is officially back to normal growth.
Perhaps one vestige of these trends is the remaining high demand. Carnival came into 2024 in its best-ever booked position, with almost two-thirds of the year booked out, and occupancy levels are at highs. Net per diems were higher than the 2019 level and above expectations, and fourth-quarter deposits were a record $6.4 billion. Full-year revenue nearly doubled, and net loss was $78 million, down from more than $6 billion in 2022.
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Key Data Points
With revenue surpassing prepandemic rates, growth rates will start to moderate. However, so far it's still going strong. Several of Carnival's lines are still reporting record bookings for this time of year.
There could be too much going on over the next 10 years to accurately predict where Carnival will be. Just when it seemed things were going to be totally uneventful, the company had to reroute 12 ships due to geopolitical conflict. It's going to take a hit to net income in the form of $0.07 or $0.08 in full-year earnings per share (EPS) as a result.
But these should be smaller events than a global pandemic, and Carnival can absorb them through its efficient operations and strong performance. Over the past 10 years, Carnival has maintained its dominant position in the cruise industry, with consistent upgrades and new lines. It's likely to continue on that path, as its current popularity illustrates.
Back to normal debt levels
The other vestige of the pandemic is soaring debt. Carnival issued debt to stay running when there wasn't any revenue, and the debt level remains elevated, at more than $30 billion. Until it comes down to pre-pandemic levels, the risk is elevated as well.
So far, the company is paying off the debt at a comfortable rate. It ended the year at $4.6 billion off its peak debt and in a $3 billion-better position than it originally expected. Management gave a January update saying that it paid off $571 million in second-lien debt at 9.9% interest.
The timeline for Carnival to fully retire the extra debt is unclear, but it should be cleared before 10 years. Carnival generated $4.3 billion in cash from operations and $2.1 billion in adjusted free cash flow in 2023, and it plans to use these cash flows to pay off the debt going forward. At the pace it's paying off the debt right now, it could be done with the burden over the next five years or so.
A long history of beating the market
Since the risk level to the investor is lower now than last year, the gain potential is lower as well in 2024. At the current price, though, the average Wall Street analyst consensus is a 50% gain.
Carnival's business isn't any different than it was before the pandemic. It's still the largest cruise operator in the world, and it's investing in becoming even better. Over time, it might continue to experience pressure from external sources. That's the nature of any business -- there are always uncontrollable factors.
Considering how well Carnival has bounced back, and how well it's managing its debt, I would venture that it will return to being a market-beating value stock very quickly. Over 10 years, that could look lumpy; there are going to be better and worse years. But if you hold for the long term, Carnival should reward shareholders. Carnival stock could be a valuable addition to a diversified portfolio.
