Carnival Corporation: Impressive, As Appeal Slowly Lures
Contributor since 2011 / 26186 Followers
Summary:
- Carnival Corporation & plc shares have seen recent volatility, dropping back to levels in the mid-teens after nearly hitting the market $20 earlier this summer.
- Despite significant progress in profitability, concerns remain about leverage and cash flows, making me await a better risk-reward proposition.
- A strong second quarter earnings report and guidance hike have led to a more positive outlook on shares, with potential for gradual involvement at lower levels.
robyvannucci
Shares of Carnival Corporation & plc (NYSE:CCL) have seen a small move lower recently, trading back to the mid-teens again, after shares re-tested highs around the $20 mark earlier this summer.
This came after Carnival re-gained profitability after huge and continued losses in the pandemic and the years thereafter. Despite the significant progress made, I remained concerned given leverage employed and cash flows, waiting for a better risk-reward proposition.
Following a strong second quarter earnings report, including a convincing hike in the full-year guidance, I am gradually turning more upbeat on the shares, which have been lagging over the summer. While I am not yet willing to turn the trigger here, I am keen to gradually get involved at lower levels, certainly if operating momentum continues.
Permanent Value Destruction
Ahead of the pandemic, Carnival was a $20 billion business which posted operating earnings to the tune of $3 billion, with net earnings power reported at $4 per share. A $50 stock was valued at $35 billion, and the business at large at $47 billion after net debt was factored in.
Revenues plunged to $6 billion in 2020, and just $2 billion in 2021, with the company posting huge multi-billion losses in the process. Revenues recovered to $12 billion in 2022, as investors were hurt tremendously with net debt increasing to $30 billion, while serious dilution in the share base has been incurred (as the share count nearly doubled).
By 2023 the company has grown revenues to nearly $22 billion, reaching pre-pandemic levels again, with operating profits of $2 billion trailing historic profitability. In fact, the huge debt load made that no real earnings were posted after a substantial interest bill.
The company guided for 2024 EBITDA to improve to $5.6 billion, some $1.4 billion ahead of 2023. These improvements should almost one-for-one translate onto the bottom line, with many of these earnings “secured” by large bookings. I believed that such improvements might result in earnings coming in around a dollar per share this year, but that does not mean that the company is out of the woods, amidst an upcoming capital spending cycle.
In March, the company posted a convincing first quarter earnings report, with net debt being stable at $28.5 billion (aided by record customer deposits) and huge occupancy levels. The company guided for full-year EBITDA at around $5.6 billion, driven by higher pricing and occupancy levels in the business.
With leverage ratios still seen around 5 times, and shares trading at $16 in March, the company commanded a steep $48 billion enterprise valuation. With the company performing better, I was growing more upbeat, as I was still cautious given the leverage, and coming investment cycle, as Carnival was not completely out of the woods yet.
Moving Ahead
In June, the company posted a near 18% increase in second quarter sales to nearly $5.8 billion. The company saw nice operating leverage, with operating earnings of $560 million having increased a factor of nearly 5 times. While a $450 million interest bill is anything but modest, the company managed to post net earnings of $92 million, equal to seven cents.
By now, net debt ticked down to $27.7 billion as the business regained profitability, with lower debt levels aided by a record customer deposits of $8.3 billion as well. The business is steaming full power ahead with travel demand being strong, as the company posted 104% occupancy levels for the quarter.
Following the strong report, the company hiked the full-year EBITDA guidance by $200 million to $5.83 billion, suggesting that third quarter results (typical the strongest due to seasonality) will be very strong. This helps to reduce leverage below 5 times here, as frankly, I am impressed with the performance of the business here.
The company is even hiking the adjusted earnings guidance by $275 million, now seen around $1.55 billion for the year, indicating that earnings close to a dollar per share might advance to $1.20 per share. Strong demand, higher onboard spending, lower inflationary pressures and lower fuel costs all aided to boost the bottom-line performance.
As anecdotal evidence, the fact that Starlink has been installed on all ships helps, and the lack of Internet connectivity might have been a reason for some travelers to be easing on cruise traveling, certainly some younger age cohorts.
What Now?
With Carnival having defied the headwind from leverage in a better way than I could have imagined recently, I am impressed by the first steps in leverage reduction. Moreover, the fact that the company has been able to become profitable here. This has given management enough confidence to place long-term orders for new ships again.
This is all greatly to be applauded as the company will see a big upcoming quarter, but shares have been lagging. Given the underperformance of the shares, the company has rapidly grown into the valuation, as it is difficult to imagine that this was a near $30 stock during the 2021 rally (despite the woes from the pandemic and dreadful results reported at the time).
All this means that I am gradually turning upbeat, but the Carnival Corporation & plc business is still very leveraged and therefore vulnerable to exogenous shocks (such as a new pandemic, higher interest rates and reduced travel demand, among a few other potential threats). Nonetheless, with the company now trading at around 12-13 times earnings, the earnings yield is decent, even if investors cannot look forward to dividends or repurchases for some time, of course.
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