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Proprietary Data Insights Financial Pros’ Top Cruise & Airline Stock Searches in the Last Month
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Carnival: Cruise or Jump Overboard?
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None of us knew whether cruise lines would survive the pandemic. Like many travel and leisure activities, they ground to a standstill. And they were one of the last to reopen. Despite the nasty setback, heavy demand backlogged bookings across the industry. In the last two months, shares of Carnival Corp. (CCL) more than doubled…and they’re still cheap. As the largest cruise operator, Carnival garnered twice as many searches from financial pros as another hot travel stock, Delta Airlines (DAL). Carnival’s focused on improving its long-term health in the same ways as the airlines – retiring older ships to improve occupancy. However, the company is still unprofitable, and despite generating cash from operations, its CAPEX turns free-cash-flow negative. So is this just a market pump or is there something more here? Carnival’s Business We’ll keep things simple since most of you know Carnival operates cruise ships. They own several brands, including their namesake, Holland, Princess, and several others. Instead, we’ll focus on the changes to its operations from before the pandemic to now. Let’s start with operating metrics:
Source: Carnival Q1 2023 Earnings Release
Source: Carnival 2022 Annual Earnings Release If we divide up the 2019 Available Lower Berth Days (ALBD is the standard measure of passenger capacity in the cruise industry), we get a number similar to Q1 2023. What we do see is though occupancy is marginally lower, the cost of fuel has gone up by roughly 50%. This is a consistent theme in earnings, where the cost of everything from labor to sales increased substantially. And it’s a big reason they aren’t yet profitable. However, as we’ll discuss below, the company plans to turn around in Q3 of this year. Financials
Source: Stock Analysis We have to start by addressing the debt elephant in the room. CCL held about $11.5 billion in net debt at the end of 2019. Now, they have $30.7 billion, down from $31.9 billion. That sent interest expenses skyrocketing from a few hundred million a year to nearly $2 billion annually. Management plans to pay off roughly $2 billion by the end of 2023. Over the next three years, management expects to generate roughly $5 billion in free cash flow per year, of which $3 billion will be allocated to pay down debt. By the end of this year, Carnival expects occupancy to exceed 100% and pricing to be up 6% compared per-diem compared to 2019, pushing the company into profitability. Valuation
Source: Seeking Alpha Comparing the cruise and airlines, we found that none of the cruise lines were profitable on a P/E basis. However, that should change by next year. CCL looks terrible on a price-to-cash flow basis. However, their forward look is 8.1x, roughly in line with Norweigian (NCLH) and Royal Caribbean (RCL). It’s worth noting that CCL’s interest expense runs around 11% of revenues while NCLH sits at 10.4% and RCL at 13.6%. Growth
Source: Seeking Alpha Obviously, the revenue growth for the cruise lines is skewed, given the drop and climb out of the pandemic. Similarly, most of the growth metrics are pretty useless. And really, the story is about profitability, not growth. Profitability
Source: Seeking Alpha To that end, Carnival runs the best gross margin, while RCL already turns a positive EBIT margin, while NCLH hasn’t turned a positive EBITDA yet. Our Opinion 10/10 It’s unlikely the cruise lines go bankrupt. Although it will take years, they should eventually return to their former glory. Before the pandemic, shares traded at almost $70. Buying this stock on pullbacks with a reasonable position size offers a great risk/reward for a long-term investor. |
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