Shares of Carnival Corp (NYSE: CCL) has been in a steady downward trend since December. They will diverge by about 18% by 2024, according to data from S&P Global Market Intelligence.
The market seems concerned that the company may not be able to live up to the high expectations. Still, this weakness is at odds with the impressive operational and financial trends the cruise line giant is posting as it finally sails past pandemic-era disruptions.
With earnings and cash flow expected to rise during the busy summer season, could the stock be a good addition to your portfolio? Here’s what you need to know.
Carnival is off to a strong start in 2024
A lot has changed for Carnival in recent years. The company last reported its fiscal first-quarter results in late March, and they were highlighted by several records. Revenue of $5.4 billion rose 23% year over year, surpassing the pre-pandemic peak of $4.7 billion from the first quarter of 2019.
That momentum has been driven by a combination of capacity growth as the cruise line continues to deploy new ships, while also managing to push booking prices significantly higher. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter was $871 million, compared to $382 million in the prior year quarter.
By most measures, cruising is now more popular than ever, and Carnival is seeing strong demand across its portfolio of brands.
Perhaps the most telling measure is the level of customer deposits, which reached $7 billion, up from $5.7 billion in the first quarter of 2023. These are the initial payments for future cruises, which provide a good indication of the growth and profit effect of the company. Carnival President and CEO Josh Weinstein commented on these themes during the company’s latest earnings conference call:
With the vast majority of this year’s revenue booked, we are even more confident of delivering record revenue and EBITDA, along with incremental improvement in operating performance that will continue well beyond 2024.
Early 2024 trends were good enough for management to raise full-year expectations. Carnival forecasts adjusted EBITDA of approximately $5.63 billion, compared to the previous target of $5.6 billion.
The company now expects 2024 adjusted earnings per share of about $0.98, revised higher than the previous estimate of $0.93 offered last December. Notably, 2024 will mark Carnival’s first year of profitability since fiscal 2019.
What’s next for Carnival Corp?
Several catalysts support a positive view of the future to 2025 and beyond.
Carnival is adding capacity, with three new ships launching this year, in addition to thirteen deliveries since 2020. This expansion translates into greater opportunities to generate revenue and revenue through a variety of onboard products and services. At the same time, the company expects the pace of deliveries to slow, with only three or four planned between 2025 and 2028.
That’s important because the reduced capital needs should allow free cash flow to increase and pay down the company’s last reported long-term debt of $28.5 billion. While this level is at least manageable given the significant level of current underlying cash flow, deleveraging going forward could support a repricing of the company’s share value.
Investors can look forward to the July 2025 opening of Celebration Key, Carnival’s private, port-resort-style destination. The new concept is likely to drive excitement about the brand and drive a new wave of booking demand. The company expects this game-changing asset on Grand Bahama Island to increase margins and passenger returns by retaining guests within the Carnival ecosystem.
Final thoughts
Overall, Carnival is well positioned to continue growing as long as the global economy remains resilient.
With the stock trading at a forward price-to-earnings (P/E) ratio of less than 16, compared to management’s 2024 EPS guidance, I believe there is good value for this market leader. Things haven’t been smooth sailing for Carnival stock in recent years, but investors who believe in the strategy and its long-term potential should be prepared to stay the course.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. On. The Motley Fool has a disclosure policy.
Shares of Carnival Corp are down 18% this year. Time to buy? was originally published by The Motley Fool
