The cruise industry is back after a short hiatus early in the pandemic. Cruise stocks were big winners last year as investors betting on their recovery were proved right, and Carnival Corp. (CCL -0.66%), Royal Caribbean, and Norwegian Cruise Line all posted strong gains.
Carnival has the most to gain -- or lose -- as the largest global cruise operator. But is the recovery over? And is it too late to buy Carnival stock?
Before, only for the risk-tolerant investor
Carnival has a long history as a market-beating stock. It operates the leading global cruise operator with a robust lineup of ships and popular itineraries. It's the kind of established, traditional business with long-term, reliable revenue streams that investors love.
The pandemic undid that -- for a short time. But even though in hindsight it looks like a recovery was an easy bet to make, it's never a sure thing when a company is struggling. Investors who took advantage of Carnival's sinking stock price were taking a risk, and they've now been handsomely rewarded.
Some investors seek out risk for the commensurate reward potential. Those investors might view Carnival's stock as recovered and move on to another distressed stock, which abound in the market. But for patient, long-term investors, this might be the best time to buy Carnival stock.
Now, only for the risk-averse
There are plenty of investors who've made a career out of betting on risky stocks, but it's not for everyone. It's certainly not for investors who have other careers and who invest for retirement or as a long-term wealth-building machine. You don't have to embrace risky stocks to achieve investing success; just ask Warren Buffett.
For investors playing the long game, Carnival is in an excellent place right now. Most of the risk associated with its recovery is over. It's now back in its dominant spot, and it's demonstrating growth, financial efficiency, and customer loyalty. It entered 2024 in its best booked position ever, for both price and occupancy. That means more people are reserving rooms than ever before, and they're booking at higher prices. While that's obviously positive for the current financial predicament, the more important indication is that people want to be on cruise ships, and there's pent-up demand. For investors, that should create confidence in Carnival's long-term potential to build its business.
Revenue is exceeding prepandemic levels, and it's paying off its accumulated debt. It generated $4.3 billion in cash from operations and $2.1 billion in adjusted free cash flow in 2023, both of which it's using to pay down the debt. The lingering impact of Carnival's early pandemic shutdown remains in its high debt levels, but its efficiency in generating cash and yielding high demand for its product should allow it to pay off that debt in a reasonable amount of time.
A low price for a high-opportunity stock
Carnival stock is down about 12% this year. Investors realize that the extraordinary performance of bringing revenue from $0 to $22 billion isn't going to be replicated, and the stock performance reflects this past opportunity, not the current revenue.
But its valuation has remained about constant, and the stock is currently trading at its average multiple during the past year.
CCL PS Ratio data by YCharts
In some ways, Carnival is back to where it was before the lockdowns started, but with more debt. Investors see the debt as the flip side of excellent performance and potential, so it weighs down the valuation. But as Carnival continues to demonstrate revenue growth and get back to net profitability amid strong demand, it should again be the market-beater it was before the pandemic. For long-term investors, this is an opportunity to buy a great stock on the dip.
