Carnival (CCL 1.63%) (CUK 1.10%) continues to make strides in its recovery from the pandemic, which, at this point, seems like a distant dream. The company is enjoying record demand, soaring sales, and improving profitability, although it's saddled with enormous debt.
Will the debt be gone five years from now? Will demand still be strong?
Smooth sailing
Carnival reported blowout results for the 2025 fiscal third quarter (ended Aug. 31). It beat Wall Street's expectations and internal guidance on the top and bottom lines, as well as every other metric, and raised full-year guidance for the third time this year.
Revenue increased 4% year over year to a record $8.2 billion, and the company reported a record $1.9 billion in net income. There were record third-quarter deposits of $7.1 billion, and booking volumes are higher than at this time last year. What made the results even more striking was that they were on a same-ship basis and at lower capacity from last year.
Carnival is likely to keep growing slowly and hitting new records. In five years, it should be comfortably profitable.
Ships are coming in
With this strong demand that's unabated for years already, Carnival is ordering new ships and adding or improving locations. It added three new ships last year and one this year, the Star Princess, and is expecting delivery of one or two ships annually, starting in 2027.
A Carnival cruise is more than the ship itself or even the route. The company owns many exclusive land assets that attract travelers and repeat customers. It opened its newest location, Celebration Key, in July to much fanfare and has already served about half-a-million guests there. It's expecting 8 million customers in the Caribbean in 2026, where it has an unrivaled footprint of seven exclusive destinations, and Celebration Key is expecting one ship in port nearly every day, with two ships in port 85% of the year.
The flip side of this is the investments in making this happen, which management is projecting to impact its profitability next year. It's expected to put more work into its existing fleet in 2026 during its drydocks, which could add up to 1 percentage point to expenses. The rest of the work on some of its new locations is expected to add another half a point.
These are necessary parts of the business and, as management pointed out, the return is far greater. In five years, Carnival should have at least five more ships, which means more capacity and more sales. It will also have more exclusive destinations and, likely, a higher number of repeat customers.
Not just one obstacle left to overcome
For years already Carnival has been reporting phenomenal growth. Now that it's sustaining it, the last hurdle to overcome looked like the debt.
Management has been taking an active stance on paying it off early and made greater progress in the third quarter. It restructured some of its debt for better terms and, year to date, has refinanced $11 billion worth of debt. Carnival ended the quarter with $26.5 billion remaining, and its net debt-to-adjusted-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio was 3.6, down from 4.7 last year.
In five years, the debt should be closer to historical norms or at least low enough, compared to revenue and assets, for Carnival to be financially comfortable.
However, a new problem has emerged that sent Carnival stock falling after the earnings report was released, despite the incredible results. Crude oil prices are rising, and all three large cruise stocks -- which include Royal Caribbean and Norwegian Cruise Line -- fell on the news.
Oil prices are a huge expense for Carnival, and it always addresses them in its quarterly reports. They can widely and quickly fluctuate, and there isn't a way to foresee how they'll move in the future and certainly not in five years.
Given the normal vicissitudes of cruise expenses over the next five years, along with Carnival's popularity and investments in its business, I see the company continuing to grow over that time period. With lower debt, the company could keep up its market outperformance.
