With the market back in fine bull form, it's getting harder to find top stocks on the dip. The S&P 500 is up 10% year to date, and it got an extra boost last week when Federal Reserve chairman Jerome Powell hinted that interest rates would get a cut at the Fed's September meeting.
Lower interest rates mean many good things for the markets. They stimulate the economy, leading to more money changing hands and more products being sold.
Specifically, they could be an excellent benefit for cruise king Carnival (CCL -0.16%) (CUK -0.28%), and Carnival stock jumped 7% on the news. It's climbing this year, but it's still 56% off of its all-time highs.
Let's see why this is great news for Carnival, and why there's still time to buy this turnaround story.
Image source: Getty Images.
Full speed ahead
Carnival is the largest cruise operator in the world, with $26 billion in trailing 12-month sales and 90 ships across its brands, compared with $17 billion and 68 ships for competitor Royal Caribbean.
In a case of the larger it is the harder it falls, Carnival has had a massively difficult time rising from pandemic lows. At this point, it's reporting record revenue and records across many other metrics; demand is at all-time highs, and it's maintaining its record future booked position.
There's progress and development all over. Ticket prices and occupancy levels are at highs, operating margin continues to expand and exceed pre-pandemic levels, and adjusted net income tripled from last year in the 2025 fiscal second quarter (ended May 31).
The company is expanding its fleet of ships to handle more demand and generate higher sales, and it's launching new, exclusive destinations to improve its value proposition and bring back repeat customers. For example, Celebration Key, which includes the largest adults-only private beach club at any cruise venue, launched in July, and the Seaborn brand is launching its first "Pole-to-Pole" voyage in 2027.
So what's the problem?
Debts and losses
Carnival is still picking up the pieces, specifically related to net income and debt. Although net income improved by $475 million from last year in the second quarter, it's still off of its prepandemic highs. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is at record highs, and it looks like only a matter of time before the company surpasses the previous record for net income, too.
The more pressing concern is Carnival's debt. It still tops $27 billion, and it's going to take a long time to get to historic levels even under the best circumstances. However, higher interest rates over the past few years have meant that this isn't even the best of circumstances. It has been doing a good job of paying it off despite the tough environment, and it's already paid of $350 million of its highest-interest debt and refinanced $7 billion at better rates so far this year.
That brings us to why last week's announcement sent the stock up. As interest rates go down, it will be easier for Carnival to pay off the debt responsibly. The fear is that sales growth will slow before there's enough "extra" money to keep paying down the debt. Lower rates make it more likely cruise-goers will keep buying tickets, keeping the growth rates stable, as well as cutting the cost of the debt.
Due to the risk here, Carnival trades at a cheap price today. Its forward, 1-year P/E ratio is only 13, while the price-to-sales ratio is 1.7. Those price in the risk, but they give it plenty of room to expand.
I don't want to dismiss the risk, but Carnival is a well-run company with best-in-class products and services and a long growth runway. It's likely that it will continue to recover and operate at historical debt levels, even though it will take a few years. If you can manage the risk and have a few years to hold on, which is the ideal anyway, Carnival should reward you many times over.
