Carnival (NYSE: CCL)(NYSE:CUK) is the largest global cruise operator. It has fully recovered after sales fell to zero early in the pandemic — and yet investors are sending its shares lower this year. It trades at a dirt-cheap valuation, but the growth story is far from over. This is why you might not see a chance to buy it again at a price like this.
Carnival is approaching again
Investors sold Carnival shares when it had to pause operations and failed to bring in revenue during the pandemic. Those betting on the recovery have enjoyed incredible gains, but the market seems to think they have outpaced last year, and Carnival shares are down 9% this year.
Business is booming. Revenue is at record levels, reaching a first quarter high of $5.4 billion in the first quarter of fiscal 2024 (ending February 29). Deposits are at a record high, reaching $7 billion in the first quarter. Because demand is high and inventory is limited, it has been able to take bookings at a high level on a longer curve and at higher prices.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) more than doubled from last year to $871 million in the first quarter, and Carnival reported positive operating income for the third consecutive quarter. Free cash flow was $1.4 billion, near historical levels.
Why Carnival Stocks Should Rise
If you look at Carnival’s stock price before the pandemic, you’ll notice that it closely reflected the company’s growth.
Although sales are at a high level and net profit is improving, the share price remains low. Net income has remained negative since the start of the pandemic, except for one quarter last year. But Wall Street expects earnings to turn positive as early as this summer, and the average analyst consensus for full-year adjusted earnings per share (EPS) is $1. Carnival’s stock price will likely rise at that point and its performance will start to catch up.
The dirt cheap price
Carnival’s stock trades at a price-to-sales ratio of less than 1, implying that investors currently lack confidence in its capabilities. This valuation is well below historical levels.
The main reason is Carnival’s extremely high debt, which stands at more than $30 billion, even though that is well below last year’s peak debt of about $35 billion.
Management has worked to put the company in a better financial position, paying off some of the highest interest notes and expanding its credit facility. As cash flow from operations and free cash flow continue to rise, management has a plan to efficiently reduce debt without disrupting operations.
The market will not give Carnival a high valuation if it is unprofitable and has a high debt load. But as those things start to change, the price will rise and valuation will likely follow.
The long term opportunity
Carnival was a market-depressing stock before the pandemic. It has an incredible brand and strong assets and is the dominant player in its field. As you can see from the chart, performance is reliably strong when there is no global pandemic, which doesn’t happen all that often.
The stock jumped last week on news that it will absorb the P&O Cruises Australia brand and operations into the Carnival Cruise Line. Demand is not slowing down and this move will expand inventory and create better efficiency for the entire company. That’s a huge boost for Carnival’s brand confidence, management and future opportunities.
Carnival is rebuilding itself with careful calculations, and within a short time frame it could return to full historical norms. The stock will reflect these movements, and you may not get the chance to buy it again at these prices.
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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.
A once-in-a-lifetime investment opportunity: Why you should buy Carnival stock now was originally published by The Motley Fool
