With less than a month left in the year, the S&P500 is up 26%, interest rates are being cut and Donald Trump is preparing to return to the Oval Office. Although the stock market looks a bit bloated, there is a sense of upside thanks to strong market indicators.
That could yield further gains in 2025, but could also lead to a correction at some point. Anyway, Carnival (NYSE: CCL)(NYSE:CUK) is poised to rise in the new year and in the long run. Here are three reasons why.
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Carnival continues to generate unprecedented and relentless demand for its products. Revenues have surpassed pre-pandemic levels and are still rising, and all signs indicate they will continue to do so for the foreseeable future.
In the third fiscal quarter of 2024 (ended August 31), revenues rose 14% year over year to $7.9 billion, already a record last year. It enters 2025 at its best booked position ever, with less inventory remaining than last year, and is even fully booked for 2026 with its best rates ever. Due to the low stock, ticket prices are also booked at high prices. It orders new ships and changes routes to meet demand where it is strongest.
Scale helps Carnival return to profitability. It’s not quite there yet, but it reported positive net income of $1.7 billion in the third quarter. Operating income was $2.2 billion, an increase of $554 million from last year. It raised guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and return on invested capital for the full year. Increasing adjusted EBITDA increases operating cash flow and free cash flow, putting Carnival in a better financial position.
Carnival shares have been on the rise since the Federal Reserve announced it would cut interest rates. This helps Carnival in two ways.
One of these is that lower interest rates stimulate the economy, because people and companies can borrow money more easily. People who have put their dream cruise on hold are more likely to spend money in a more active economy with lower interest rates. It’s more likely that Carnival can sustain its strong demand in the looser economy.
What’s even more concerning to investors, however, is Carnival’s high debt levels. It grew enormously when Carnival stopped receiving money and needed money to continue. Carnival has since found itself in a precarious position, even as operations have recovered and revenues are reaching record levels. It has been steadily paying down its debt, reducing it through prepayments, restructuring and getting rid of the highest-interest notes.
There are concerns that demand will slow before Carnival can reduce debt to manageable levels. But as sales rise and the company generates more cash, it seems more likely that it will be able to reduce this to a reasonable level. With interest rates lower, investors are more comfortable with Carnival’s ability to pay off its debt within an acceptable time frame.
Carnival’s stock trades at a price-to-sales ratio of 1.3 and a one-year price-to-earnings ratio of 15. That’s an objectively cheap valuation, but valuations are never objective. With its high debt and unreliable profits, Carnival’s stock doesn’t deserve a premium.
However, the story keeps getting better. The stock may justify a higher valuation as fundamentals improve. So, for example, if profits continue to rise with greater stability, the price will not only rise at the same rate, but also faster.
The short term is still uncertain and the most risk-averse investors may want to wait. But most investors can confidently take a position in the shares of this market leader at current prices.
Consider the following before buying shares in Carnival Corp. buys:
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. On. The Motley Fool has a disclosure policy.
3 Reasons to Buy Carnival Stock Like There’s No Tomorrow was originally published by The Motley Fool
