Once Left For Dead Stock Now Showing Signs of Life

Unbreakable. 

It’s one word to describe the cruise sector after what it’s had to deal with over the last two years.

Crippled and on the brink of collapse, companies were forced to shut down due to health concerns. 

In order to keep business alive, they had to take massive amounts of debt. 

Fast-forward to the present, the sector is making a comeback thanks to improved health conditions and consumer appetite to travel again. 

But while the stocks in the space have popped from their 2020 lows, they are still trading way off their pre-COVID 19 highs. 

Of course, new challenges are arising, like higher fuel costs, and a possible economic slowdown due to higher than expected inflation. 

But as an investor, you have to believe cruise lines have overcome the worst possible outcome. And while recovery might be slow, there are several good reasons to be bullish in this sector. 

If we had one pick, it would be the largest player in the space, Carnival Corporation (CCL).

It’s the largest cruise line by a mile no matter what metric you use: passengers, ships, food served at sea.

So it shouldn’t be much of a surprise that Carnival nearly 3x the searches from financial pros than the next most searched travel services stock.

Heck, it’s searched almost 5x more than the next cruise line, Royal Caribbean (RCL).

Does that mean it’s at the top of its game?

Crash Warning: Everything just changed(Sponsored)

Stocks plummeted this week. Investors are terrified. And Morgan Stanley just announced a “20% drop in the S&P 500” could happen any moment. It’s time to prepare for a market moment that could define your wealth for the next decade. A small group of U.S. investors are in line to receive advance notice of the exact day of the next market crash. 

Click here for the exact day stocks will crash

Carnival’s Business

Carnival Corporation & plc (CCL) is the world’s largest leisure travel company with 87 ships sailing under 9 brands, which include: Princess (TV buffs might remember it from the show the Love Boat), and Cunard, which built the world’s largest ocean liner at the time, Queen Mary 2. Its most notable brand is Carnival Cruise Line, which has 22 ships, operating 1,500 voyages annually. 

Revenues are split between ticket sales and onboard and other sales.

In 2019, ticket sales accounted for 67.8% of revenues.

CCL employs over 120K people across the globe and serves more than 13M guests worldwide.  

As one can imagine, the cruise industry has been impacted greatly from the COVID pandemic. However, CCL is showing signs of life. 

For example, the firm ended 2021 with 50 ships in guest cruise line operations compared to 1 ship in 2020. 

And as of January 13, 2022, eight of the company’s nine cruise brands resumed guest operations.  CCL expects them all to be back by this summer. 

CCL Financials

It’s hard to analyze CCL based on the last two years. After all, its business was virtually shut down thanks to COVID. 

That’s why using traditional metrics like revenue, EPS, and gross margin—won’t help us much here. 

What we need to focus on is the company’s liquidity, cash, and debt positions. And answer the question: Does CCL have enough resources to pay for its needs while the company’s core business comes back on line?

CCL ended 2022 with $9.4B of liquidity, including cash, short-term investments and borrowings available under the revolving credit facility, and $3.5B of customer deposits, an increase of $1.3B from 2020.

The firm also refinanced over $9B, reducing its future annual interest payments by approximately $400M per year, and extending maturities, optimizing its debt maturity profile. 

To further illustrate this point, all you have to do is take a look at the firm’s price to book ratio. CCL has a price to book ratio of 1.86, which is below the 3.0 ratio that many value investors consider to be a good sign of an undervalued stock.  

Furthermore, CCL has made strides to operate its fleet more efficiently. 

The firm decided to exit 19 ships as part of its fleet optimization strategy, which resulted in more fleet efficiency, and lowering its planned capacity growth to approximately 2.5% compounded annually from 2019-2025, down from 4.5% annually pre-COVID 19.   

CCL Valuation

Believe it or not, CCL is relatively undervalued if you assume they can return to similar profitability they had before the pandemic. 

For example, if you look at the firm’s Price to Sales Ratio, you’ll notice how dirt cheap CCL is. Based on the 3-year price to sales ratio the stock should be trading at $69.86.  

Moreover, CCL plans to grow substantially over the coming years…

The firm expects to reach an EPS of 1.69 by November 2023, and 2.94 by November 2025. Clearly, a rising EPS is a show of growth and profitability. 

Moreover, the firm is making excellent strides to reduce the stress of its debt obligations. For example, if you take a look at the current ratio and quick ratio— it’s lower last quarter than it was on average in 2021. 

Despite the improvements, CCL is trading down from its 52-week highs, which is $31.52, and a far cry from its all-time high of $72.70 (Jan. 2018). 

Even analysts on Wall Street believe CCL should be trading higher. The average analyst price target for CCL this year is $25.14.

Our Opinion 7/10

Carnival Cruise (CCL) has to borrow money to keep its business afloat after COVID-19 hit. However, operations are back up and running. 

The firm has made significant strides to slash its debt through restructuring, and optimize its fuel efficiency as a method to cut down on costs. 

And while the impact might not be immediate, the firm has a roadmap to profitability. In fact, the firm expects to have a positive earnings per share by the year 2023. 

Currently, shares are trading well below the analysts estimates, and sharply lower from the company’s 52-week highs

If you’re patient, we believe this play could pay off over several years.