Despite being decimated during the depths of the COVID-19 pandemic, Carnival Corp. (CCL +1.99%) (CUK +1.69%) kept sailing.
The water was rough and choppy. However, now the sea is calm. And this business is operating at a high level. Its stock price is up 169% in the past three years.
Where will Carnival shares be three years from now? Here are three reasons to believe they'll be trading at much higher levels.
Image source: Carnival.
1. Durable demand in the cruise industry
The cruise industry overall is positioned well to continue growing. Cruise trips can usually be 25% lower than the cost of land-based alternatives, providing a notable value proposition for consumers who might be feeling the pinch in today's macro environment. The industry is drawing in younger customers, as well as those who have never been on a cruise before, essentially expanding the market opportunity.
Carnival has been thriving. During each quarter of fiscal 2025 (ended Nov. 30), the company reported record revenue; net yields (a proxy for pricing power); adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA); operating income; and customer deposits. And nearly two months ago, Carnival said that two-thirds of its 2026 schedule was already booked up.
2. Financial improvements to the business
As Carnival's revenue climbed from the worst days of the health crisis, it has gotten to experience operating leverage. The result has been impressive profits. The company's adjusted net income soared 60% year over year to $3.1 billion in Q4. Generating more profits is undoubtedly an encouraging trend, but it's just part of the story.
Carnival's leadership team is focused on taking its improving income statement and translating that to a stronger balance sheet. This means steadily reducing long-term debt, which stood at $26.6 billion at the end of Q4. That's down $10 billion from the peak in early 2023. Should Carnival continue on its current path, investors can be confident that the debt burden will be lower in three years.
This reduces financial risk. And it can support earnings power. Management expects $700 million in net interest expense reductions in fiscal 2026 compared to fiscal 2023.
NYSE: CCL
Key Data Points
3. Investors can benefit from valuation upside
Even though Carnival's share price has soared in the past 36 months, the stock doesn't look expensive today. The market is asking prospective investors to pay a forward price-to-earnings ratio of 11.3 to buy the company. That's a sweet deal when you consider the records Carnival keeps breaking with its key metrics.
There's a very good chance that if you buy this travel stock right now, it will outperform the broader market over the next three years. Just don't expect another 169% gain.
