Famous cruise line Carnival Corporation (CCL -0.40%) has been a hot stock over the past year. Shares have nearly doubled. Investors buying the stock as a play on recovering consumer spending following the pandemic were proven right by the market.
But now it could be time to lock in profits and say goodbye to Carnival stock.
The company has done an admirable job of bouncing back to pre-pandemic top-line performance, but the pandemic's impact on the business has deteriorated Carnival's earning power.
Investors should avoid buying shares now; those who own stock may even consider locking in profits.
Here is why.
The share price doesn't tell the whole story
It took three painful years, but Carnival's business has rebounded. The company ended 2023 with $21.6 billion in revenue, roughly on par with 2019, the year before COVID-19 turned the business upside down.
At first glance, something seems amiss in the below chart. The stock still trades at a fraction of its pre-pandemic share price despite revenue recovering fully.
CCL Revenue (Annual) data by YCharts
Why is that? Carnival had to take drastic measures to keep the business afloat when lockdowns virtually reduced revenue to nearly zero. After all, the company has overhead, even if ships aren't sailing. Shares were issued, and debt was incurred to raise the cash needed to keep Carnival alive and see its recovery through.
Carnival's earnings aren't what they once were
All that bloats the stock's valuation. Investors can see Carnival's enterprise value below. That is Carnival's market cap plus debt minus cash on hand. The company's enterprise value peaked at $60 billion, and today's $50 billion is much closer to said peak. If the stock were to hit $70 again, Carnival would be a much larger company than it ever was.
CCL Enterprise Value data by YCharts
You could also look at it from an earnings perspective. At its peak, Carnival earned over $4 per share in profit. Interest from debt reduces earnings, while having more shares dilutes investors by spreading Carnival's profits thinner. Analysts believe Carnival will earn $1.00 per share this year and $1.37 next year. That's a nice year-over-year jump in earnings, but it's coming from a far lower base number than it once was.
CCL EPS Estimates for Current Fiscal Year data by YCharts
Carnival will likely need to grow to justify more stock price appreciation. However, remember that Carnival is a capital-intensive business. New ships cost a ton of money to build, staff, and maintain, and Carnival's debt is putting a cap on fleet expansion. Management has stated that they're pulling back on spending to pay down debt. Three new ships will be delivered next year, but none will come in 2026, and just one in 2027.
Here's the bottom line
It's hard to see Carnival, already seen as an entry-level cruise line, raising its prices to grow earnings dramatically. The likely outcome is that earnings stagnate for a few years while Carnival gets its financial legs under it. Little growth and a bloated balance sheet don't bode well for the stock.
Investors sitting on gains should claim profits in case this stock starts to sink.
