One of last year's biggest winners has been taking in water this year. Shares of Carnival Corp. (CCL 4.92%) more than doubled last year. The world's largest cruise line operator isn't exactly coasting in 2024, down 23% so far this year.
This doesn't mean that it's not a good time to walk the gangway and board Carnival before the ship starts sailing again. Let's go over some of the reasons why right now could be a good time to warm up to the top player in watery adventures. Bon voyage.
NYSE: CCL
Key Data Points
1. Folks are cruising again
Most of Carnival's slide this year happened after it posted mixed financial results late last month. The shares did inch higher the day after the company announced its fiscal first-quarter results four weeks ago, only to slide 17% after the initial move up.
It was a solid report. Revenue rose 22% to $5.4 billion, narrowly missing Wall Street's top-line target. The big takeaway from the report should've been positive. It was a period of record revenue. Carnival finally hurdled its previous pre-pandemic peak for the fiscal first quarter.
It's not just revenue that's at a high-water mark. Carnival's outlook is even better. Demand is partying on the lido deck. Its booked position for the balance of this young fiscal year is its best on record in any year at this point. Carnival expects net yields -- basically revenue per available cruise day without some variable expenses like travel agent commissions and subsidized air transportation -- to rise another 10% this year.
Image source: Getty Images.
2. The bottom-line beats keep coming
The news is even better on the other end of the income statement. Carnival did post red ink, but it was a smaller loss than analysts were forecasting. Its operating profit was positive -- reversing a deficit from a year earlier -- but interest expense gnawed its way into the seasonally sleepy quarter.
This isn't the first time that Carnival lands well ahead of what the market was expecting. It's been a perpetual beater since getting its fleet back into operation after the COVID-19-related shutdown. More importantly, the last three quarters have been hammered home with double-digit positive earnings surprises.
| Quarter | EPS estimate | Actual | Surprise |
|---|---|---|---|
| Q4 2022 | ($0.87) | ($0.85) | 2% |
| Q1 2023 | ($0.60) | ($0.55) | 8% |
| Q2 2023 | ($0.34) | ($0.31) | 9% |
| Q3 2023 | $0.75 | $0.86 | 15% |
| Q4 2023 | ($0.13) | ($0.07) | 46% |
| Q1 2024 | ($0.18) | ($0.14) | 22% |
Data source: Yahoo! Finance. EPS = earnings per share.
3. You may be surprised by the valuation
Carnival may have been profitable in just one quarter over the last four years, but look where the ship is headed. Carnival's guidance last month called for an adjusted profit of $1.28 billion, or $0.98 a share. This finds Carnival trading for just 14 times this year's earnings.
The horizon gets even more snapshot friendly if you look out even longer. Analysts have been jacking up Carnival's fiscal 2025 prospects with every passing quarter. Wall Street pros are now modeling adjusted earnings of $1.42 a share for the next fiscal year that starts in December. Yes, the slide in Carnival's stock this year finds it now fetching just 10 times next fiscal year's profit target.
4. Carnival is tackling its debt problem
Carnival and its peers had to do a lot of things to remain in business during the pandemic shutdown. The industry was unable to access needle-moving government aid given the foreign-flagged nature of its ships sailing in international waters. It had to issue stock at desperately low price points, weighing on its per-share profitability. Its long-term debt would go on to more than triple, peaking at nearly $33 billion a year ago.
Carnival is cutting checks now that cash flow is positive. It paid down its debt by $4 billion in fiscal 2023. It reduced its leverage by another $1.8 billion so far in fiscal 2024. Tackling debt that is about to come up or at the highest rate is going to make things a lot easier for the cruise line giant. Just imagine how easy things will get when rates start to move lower and its improving credit quality gets going.
The prospects are strong for cruise line stocks. Carnival is stronger, smarter, and even cheaper than you probably think.
