Carnival (CCL 0.14%)(CUK 0.30%) stock has made an incredible rebound over the past few years from its pandemic-induced plummet. It's up 265% over the past five years, and its business has not only fully recovered, but it's experiencing unrelenting record demand.
However, shares dipped after third-quarter earnings, providing an attractive entry point for investors. It's unclear why the market was disappointed in the report, although growth is slowing. More likely, it had to do with oil prices, since all of the large cruise company stocks fell in a similar trend.
Investors who have been on the fence can use the dip to their advantage, and the stock is already climbing back, so now is the time to buy. Here are three reasons why.
Image source: Carnival.
1. Excellent management
Every company, starting at the top, will experience times of challenge. Good management is key to dealing with difficulty and operating under pressure, and more than that, handling challenges well signifies management that can make good decisions when things are going right. That's why it's one of the most important things investing legend Warren Buffett looks for in a top stock.
Carnival's management has steered it through a tremendously difficult time, starting with zero revenue and working its way back up to record levels in five years. Although it took some drastic actions, including building up a massive debt, it has retained its status as the dominant global cruise company and is back on the offense, purchasing new ships to meet sky-high demand and rolling out new, attractive destinations and trips for its loyal customers.
This is a reason to be confident that management can continue to guide the company to new heights and roll with whatever comes its way in the future.
NYSE: CCL
Key Data Points
2. Lower debt
Management is now in the stage of paying off the company's massive debt, and it's gone remarkably well. It ended the third quarter with $26.5 billion in debt, nearly $10 billion off its peak of $35 billion in 2023. That's almost a third of the total in two years, and keep in mind that it wasn't zero when the pandemic started. Many companies keep a healthy debt for various reasons, like being able to pay a great dividend or to ensure healthy investments in operations. Well-managed companies service the debt responsibly, keeping a comfortable cash and liquidity position. Carnival's debt levels historically have been below $10 billion, which means it has another $16 billion or so to pay down before reaching a level that most investors would probably find suitable.
At the current rates it's been paying it off, it wouldn't take more than a few more years to get it back to those levels. Also, keep in mind that it paid off that chunk when interest rates peaked at their highs. As they go down, it should be easier to pay it down even faster.
There are still a lot of moving parts here. One of the things investors may not have liked about Carnival's earnings report is that it converted some of its convertible debt into equity, which dilutes the stock. But that's not unusual, and in this case, investors knew it was coming. The positive effect is reducing the debt.
3. Priced to buy
The market is still heavily weighing in the high debt, and Carnival stock is still cheap today, trading at a price-to-sales ratio of 1.6 and a forward, 1-year P/E ratio of 12.
That's a low valuation that gives the stock plenty of room to expand without becoming expensive. As Carnival continues to report strong results and reduce its debt, the stock is likely to reward investors.
