The Great Withdrawal Carnival company(NYSE: CCL) The price the shares have suffered since 2018 makes sense at first glance. The COVID-19 contagion has devastated the leisure cruise industry. So – like so many other companies at the time – this company borrowed heavily to survive. Although the pandemic has now subsided, it doesn’t feel like the economy has ever fully healed. All of that debt also still sits on Carnival’s balance sheet, costing the company money it hadn’t paid out just a few years earlier.
Carnival, however, does much better than it seems, despite the background.
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The market is starting to realize this. Shares are up significantly from their late 2022 lows. However, this stock is still down 65% from its 2018 high, leaving plenty of room to continue rising.
Carnival Corporation operates a major cruise line of the same name. It owns a fleet of almost 100 boats, including lesser-known brands such as Costa, Aida and Princess. The $36 billion company is on track to do $25 billion in business this year, a 16% increase over last year’s revenue. Roughly a few billion of this will be converted into net profit. Sales now surpass Carnival’s pre-pandemic totals, although profits have not quite fully recovered to 2019 levels.
Data source: StockAnalysis.com. Chart by author.
Mostly blame inflation and interest payments. The company now pays out about $400 million in interest payments every quarter, up from a tenth of that amount before the start of the pandemic. Operating costs such as fuel and labor costs are also disproportionately higher for the time frame.
But don’t miss the forest for the trees. Carnival stock is now as much of a buy as it’s ever been, if not more so.
As strange as it may sound (given the financial pressures most households say they are experiencing these days), Carnival’s business has never been better. Last quarter’s revenue of $7.9 billion was not only up 14% year over year, but also a record-breaking third quarter. Operating income of $2.2 billion was also a record breaker. Growth on both fronts expanded established trends.
CCL Revenue Data (TTM) according to YCharts.
The only thing holding the company back is a lack of boats. Almost half of the capacity for next year has already been booked, while trips for 2026 have also been booked at record levels. This demand has allowed the company to increase its prices, which people have not protested.
What gives?
Take the data at face value. While even higher-income households are keeping a closer eye on their spending in these circumstances, ocean cruises remain a surprisingly affordable holiday option. For many people, cruising is a splurge worth the cost, while the alternative could be no trip at all.
Things can only get better. Analysts with JPMorgan I believe the leisure cruise industry is on track to serve 34.7 million passengers this year, surpassing last year’s record of 31.7 million on its way to 39.7 million by 2027. That’s not absolute growth, nor a huge number of paying customers. However, it is huge for the major players in the leisure cruise sector, such as Carnival. It now reports a return of just over 10% on each new capital invested.
The majority of this capital investment will of course consist of the purchase of new ships that will help meet the demand that cannot now be met. Therefore, there is little doubt that the company will be able to fill the three ships due for delivery between now and 2028. There is also little doubt that the three additional boats due to be delivered between then and 2031 will fill up quickly.
The $26.6 billion in long-term debt that just hit Carnival’s balance sheet? Of course, that’s a legitimate concern. It costs the company more than a little money on a recurring basis.
However, look deeper. The leisure cruise company is slowly but surely reducing this debt – and its quarterly costs – with the real profits it brings. And much of any debt that cannot yet be repaid or eliminated will at least be refinanced at lower interest rates, taking advantage of the company’s recently upgraded credit ratings from Standard & Poor’s and Moodys. Fitch has also just started covering Carnival’s debt, with the company’s bonds assigned a respectable BB.
Typically, Carnival stock is a buy here as it becomes increasingly clear that the business model still works and the pricing power is resilient. It doesn’t look like this will change anytime soon either.
After a shaky 2024, the economy could be headed for better days that generate more discretionary income. Not only does inflation continue to moderate, but The Conference Board reports that U.S. companies are expanding their 2025 payroll budgets by 3.9%, up from this year’s 3.8% increase. This leaves more discretionary dollars in people’s pockets, allowing them to afford a vacation they might not otherwise have taken. Carnival is poised to be one of the main beneficiaries of this dynamic.
Don’t wait too long to jump if you’re interested. As the above chart of Carnival stock illustrates, other investors are quickly turning into believers. They are likely taking advantage of the earnings recovery that is dramatically outpacing the company’s revenue growth.
Consider the following before buying shares in Carnival Corp. buys:
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JPMorgan Chase is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in JPMorgan Chase and Moody’s. The Motley Fool recommends Carnival Corp. On. The Motley Fool has a disclosure policy.
1 Growth Stock Down 65% to Buy Right Now was originally published by The Motley Fool
