After the tumultuous seas of the first pandemic days, Carnival (NYSE: CCL) (NYSE:CUK) has sailed in calm waters. The world’s largest cruise line recently reported a record-setting quarter, beating analysts’ profit expectations and raising full-year expectations for the third time.
The recipe for such success? Carnival has emphasized controlled spending, cutting costs in key areas such as fuel, and has made efforts to increase onboard guest spending.
All this has helped Carnival, which had to suspend sailings during the early stages of the pandemic, get back on the path to financial health – and growth. Investors have recognized the company’s progress, sending the stock up more than 29% in the past year.
In the future, the stock could post even more gains. This is partly due to Carnival’s fantastic earnings figures, but another element could be even better news for shareholders.
Carnival’s debt wall
Let’s first look back in time at the challenges that Carnival has faced in recent years. The suspension of sailings pushed the previously profitable company into losses and resulted in Carnival building up a wall of debt. This also weighed on the shares, which plunged almost 60% in 2020.
But Carnival set the sails in motion for recovery through several cost-cutting efforts — from limiting new ship orders to designing routes that promote fuel efficiency — and travelers rushed back to this popular type of holiday when coronavirus restrictions were eased . All of this has put Carnival on the path to this latest quarter’s superstar results.
In the quarter, Carnival reported record operating income of $2.2 billion, record third-quarter revenue of $7.9 billion, and a cumulative advanced booking position for 2025 that surpassed this year’s – all at higher cruise prices . Revenue and earnings per share both exceeded analyst expectations for the quarter.
Finally, Carnival has raised its full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance to $6 billion – that’s almost $200 million more than expectations a few months ago, and represents an increase of 40%. from last year. And the company also expects an adjusted return on invested capital of 10.5%, half a point better than previous expectations.
This is all fantastic news and points to more growth for Carnival. But another element represents even better news for the company and shareholders, as it could help Carnival tackle its biggest challenge today: reducing debt. And that’s the latest move from the Federal Reserve.
A big step by the Fed
The Fed recently cut rates by 50 basis points – a bigger-than-expected move – and suggests it may cut rates twice more before the end of the year. This initial step is the central bank’s first in four years and marks the path to lower costs for highly indebted companies – such as Carnival.
As it stands, Carnival has managed a complicated situation well, with a focus on paying down variable-rate debt to make itself less vulnerable to interest rate swings. “We will continue to look for more opportunistic refinancings over time,” Chief Financial Officer David Bernstein said in the recent earnings call. This suggests that a lower fare environment could significantly reduce Carnival’s costs over time and help the company achieve its financial health goals.
Carnival has gradually improved its net debt to EBITDA ratio, a measure of a company’s debt load relative to its cash flow, and considers itself “two-thirds” of the way to investment-grade status – which it aims to achieve in 2026. (Carnival also has prepaid debt, for example paying off $7.3 billion in debt since early 2023.)
So yes, Carnival’s earnings news is great for the company and investors, but the Fed’s recent move — along with the idea that more rate cuts may be on the horizon — could be an even brighter sign. This should give the cruise giant an extra boost when it comes to reducing debt, an effort that will lead to smoother sailing for Carnival and its shareholders.
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Adria Cimino has no positions in the stocks mentioned. The Motley Fool recommends Carnival Corp. On. The Motley Fool has a disclosure policy.
Carnival set a quarter of records. But here’s even better news for shareholders (and it could boost the stock). was originally published by The Motley Fool
