Carnival (CCL 1.31%) (CUK 2.04%) was a popular meme stock early in the pandemic, but now that it's back up and running, it's lost its luster in the investing community. Risk-taking investors who made money on its rebound have pocketed their gains, and Carnival stock is down 13% this year.
Is the rebound over? And is it too late to buy?
The largest cruise company in the world
People recognize the Carnival name, but it actually owns several global cruise lines such as well-known brands Princess and Holland America. Carnival stock recently got a boost after it announced that it's sunsetting an Australian cruise line to increase guest capacity for the Carnival line.
Demand is strong, and that's been incredible for Carnival's pandemic rebound. The summer is "wave season," when Carnival sees its highest seasonal demand, and it's been reporting records all around as bookings soar. Fiscal first-quarter (ended Feb. 29) revenue of $5.4 billion increased by $1 million over last year's figure, which was already a huge recovery, and was a first-quarter record. Net yields, a cruise profit measure, and per diems were at record levels, and Carnival surpassed guidance across metrics. With people anxious to get cruising again, Carnival had high bookings out across a longer curve, leading to high ticket prices for longer times. That's resulting in high volume and sales, and it's slowly trickling down to the bottom line.
Operating income has been positive for three consecutive quarters, coming in at $276 million in the first quarter, and cash from operations was $1.8 billion. Adjusted free cash flow was $1.4 billion. It reported a net loss of $214 million, down from $693 million last year.
Can it keep it up?
The question of whether or not it's too late to buy Carnival stock is really a question about how much growth it has ahead. It grew at a steady and strong rate before the pandemic, and with demand at highs, it looks like it will eventually stabilize back to regular growth rates. However, there may some bumps along the way as demand slows.
Another factor to consider is valuation, since a too-high price is a setup for a pullback. Carnival trades at a cheap price-to-sales ratio of 0.9, so I don't think investors have to worry about the price being too high right now. Before the pandemic, it was trading at around 2 times trailing 12-month sales, which is standard for an established industry leader. There's a lot of growth still not priced into this valuation.
However, it implies that investors are still concerned about Carnival's prospects, at least in the near term. There are a few reasons why. One is that the elevated demand is bound to stop at some point, and revenue growth should begin to taper off. If the price gets too high and that growth gets priced into the valuation, the price will fall -- that's part of why it's falling this year. If sales slow before Carnival's profitability improves, Carnival won't be in a good position financially. Analysts are expecting adjusted earnings per share (EPS) of $1.16 this year and $1.68 next year after flat EPS in 2024, so things are on the upswing, and it looks like it's going to continue.
The other major piece that's holding back investors is the debt.
The all-important debt piece
Carnival borrowed massive amounts of money to keep its doors open when there were no cruises. That was a short amount of time, and it's been back in operation for three years now. But it still has a ways to go to finish paying off the debt.
It wasn't debt-free before the pandemic, but it kept its debt at around $10 billion. Established, dividend-paying companies often keep some debt on their balance sheets to drive a positive cycle of bringing in money to run the company, pay the dividend, and come out on top. Carnival was paying a growing dividend before the pandemic, and it hasn't reinstated it yet.
It has about $30 billion of debt remaining as of the end of the first quarter, which puts it about $20 billion above comfort levels. It has already paid off $5 billion since its peaks levels, and if its continues to pay it off regularly, that gives it another few years to get into its comfort zone.
Although it's been paying it back deliberately and efficiently, including paying off some if its highest-interest notes in the first quarter, it can't afford any big mistakes or challenges under these circumstances.
The good news is, it's not too late to buy Carnival stock. There's plenty of more growth coming, profitability is improving, and it's paying off its debt carefully, all while enjoying incredibly high demand that isn't letting up. There could be some near-term swings, but Carnival should have many years to climb and return to beating the market.
