Carnival Cruise: Continuing Optimistic Views
Contributor since 2021 / 2552 Followers
Summary:
- Despite a 56% rise in the stock price and a potential economic slowdown, I maintain a positive opinion of Carnival Corporation due to strong travel demand.
- The company reported a record revenue of $4.9 billion and expects higher prices and an over 107% occupancy rate in the coming quarter.
- CCL reported a GAAP net loss of $407 million due to a high debt burden.
- Investors should keep an eye on the overall travel market, as Carnival requires a favorable pricing environment to be profitable.
- Carnival’s valuation is fair assuming that the demand for travel continues to be elevated.
Joel Carillet
Introduction
Travel demand has been strong throughout 2023. Consumers’ desire for experiences and services has surpassed many investors’ expectations for the past few years. On this solid foundation of demand, the cruise industry has been recovering at breakneck speed from the pandemic lows, and as a result, I gave a buy rating on Carnival Corporation (NYSE:CCL) on May 6th. The main reasoning behind my bullish thesis was a positive demand environment that dwarfed potential risks including high debt and an economic slowdown. Today, I am maintaining my positive opinion of Carnival despite a 56% rise in the stock price since my last article and the continued possibility of an economic slowdown leading to moderating travel demand. The already thought to be an overheated travel environment is heating up even more entering the busiest summer days in the year creating an even better environment for Carnival warranting this opinion. Further, with no signs of this environment ending, Carnival Corporation is a buy.
Report Card
On June 26th, Carnival reported 2023Q2 earnings. The company reported a record revenue of $4.9 billion as Carnival “saw [a] continued acceleration of demand” leading to “total bookings made during the quarter reaching a new all-time high for all future sailings.” This is reflected in the total customer deposit increasing to $7.2 billion compared to $6 billion in the previous quarter. However, despite the elevated demand environment, the company reported a GAAP net loss of $407 million due to a high debt burden. While the company’s operating income was $120 million, a quarterly interest expense of $542 million was the primary reason for a net loss.
In my opinion, the investor takeaway from the current earnings report is slightly mixed. As the industry sees continued strong demand with Carnival expecting higher prices and over 107% occupancy rate in the coming quarter, profit is expected warranting a continued optimism for the company’s stock. However, risks should be considered as well. If Carnival requires over 100% occupancy with an extremely favorable pricing environment to be profitable, is the company’s stock a safe investment option in a potentially moderating or reduced travel demand environment? As the current environment and an environment in the foreseeable future continues to be positive, I am maintaining my bullish views, but investors should keep an eye on the overall travel market and consumer sentiment towards travel.
Travel Demand
Looking into the details surrounding the travel demand which continues to dwarf potential risks, the environment is astounding.
During Carnival’s earnings call, the management team provided insight into the current phenomenon. CEO Josh Weinstein said that the company “hit all-time highs for bookings and customer deposits” as Carnival is “still experiencing a phenomenal wave season.” This demand allowed the company to drive “cruise ticket prices above 2019 while maintaining record onboard revenue growth” and increasing occupancy rates. Overall, the company is expecting to bring in “another $275 million to the bottom line for the year” above previous expectations. Moreover, over 90% of 2023 is on the books with the company’s “booked position for 2024 also stand[ing] at record levels” at over 50% of the next 12 months.
Clearly, the company is seeing an acceleration in demand as consumers highly value experiences with no signs of moderating for the foreseeable future. Further adding credibility to the company’s views, U.S. Travel Association provided a similar view. The association said that “the economy’s negative effects on total travel spending is expected to be limited in scope and duration, as consumers continue to prioritize and value travel.”
For the foreseeable future, the demand environment is expected to be favorable for Carnival Corporation. Consumers seem to heavily value travel and experiences. Carnival’s heavy debt requires constant monitoring of the travel environment, but for now, I believe a continuous bullish thesis is reasonable.
Valuation
Since my last article, the company’s stock is up about 56%. The valuation is no doubt elevated relative to the past few months, yet I do not believe it warrants a sell rating. The company currently has a market capitalization of about $24 billion with a 2024 forward price-to-earnings ratio of about 20. This figure, in my opinion, is fairly reasonable. Over the last ten years, the company’s average price-to-earnings ratio was 19.13, exactly on par with the current levels. Thus, unless the travel demand environment craters, even with the recent skyrocketing of the stock price, I believe the company’s valuation to be fair.
Risk: Can This Last
Travel demand is strong warranting a buy rating, yet as I have mentioned earlier, the company’s debt load is extremely burdening. It is true that the company started to deleverage its balance sheet, but the process will take years, which raises a question: can the travel demand continue to be elevated allowing Carnival to deleverage?
Today, the company currently has a total long-term debt of about $32 billion with a cash balance of about $4.5 billion posing significant balance sheet risk to the company. However, I believe that even when travel demand stops accelerating, Carnival will be able to turn a profit leading to the company being able to deleverage its balance sheet. Through ups and down in the economy, Carnival Corporation has been consistently profitable throughout the 2010s and even during the recession of 2008. In the 2008 annual report by Carnival, the company says the following:
Overall, 2008 was a challenging but successful year for Carnival Corporation & plc. We posted net income of $2.3 billion, or $2.90 per share, during one of the most trying economic climates in modern history and maintained our position as the world’s most profitable vacation company.
As such, unless an event with a similar magnitude to the pandemic happens, I continue to believe vacationers will flock to cruises throughout different economic cycles, especially after the pandemic when many people likely realized that vacationing and experiences are extremely valuable. Financial burden may cause moderation in the demand environment, but as seen in 2008, it will likely not cause a catastrophe like the pandemic times. Therefore, despite the balance sheet risks, I continue to believe Carnival is a buy.
Summary
Travel demand continues to accelerate. Although the demand for travel has been at an elevated level throughout 2023, consumers’ appetite for travel continues to strengthen. This is likely the result of consumers’ starting to value experiences far greater than durable goods. Riding this wave, Carnival is expected to continue its outperformance. There is a concern regarding the company’s balance sheet as the debt load is burdening. However, considering that Carnival was not significantly impacted by the 2008 recession, without a pandemic like the black swan event, it is likely that Carnival will continue deleveraging despite some potential minor economic turbulence. Therefore, I continue to believe Carnival is a buy.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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