Is it too Late to Buy Carnival (CCL)?

Carnival’s (CCL) record-breaking Q2 performance sent financial pros into a frenzy, according to our TrackStar data.

The company trounced estimates as vacation travel continued to bounce back from the pandemic.

Source: Carnival Q2 Investor Presentation

Shares climbed over 20% on the news before giving up half those gains a few days later.

Apparently, the hurricane barreling through the Caribbean was enough to send all cruise lines’ stocks lower.

But does that give us a second chance to scoop up shares at a discount?

Carnival’s Business

With a fleet of over 90 ships visiting more than 700 ports globally, Carnival is the world’s largest cruise line.

And they have a little something for everyone, from family-friendly adventures to luxury voyages, across their brands, including Carnival Cruise Line, Princess Cruises, Holland America Line, and Costa Cruises. Carnival’s ships feature extensive onboard amenities such as restaurants, entertainment venues, spas, and recreational facilities. 

Source: Carnival Q2 Investor Presentation

In 2023, the company served approximately 13 million guests, showcasing its significant market presence in the global cruise industry.

Carnival Corporation & plc segments its business into the following areas:

• North America and Australia (NAA) Cruise Operations (68% of total revenues) – Includes brands primarily serving North American and Australian markets
• Europe Cruise Operations (31% of total revenues) – Comprises brands focused on European cruise travelers
• Cruise Support (1% of total revenues) – Provides services to the cruise brands, including port destinations and islands
• Tour and Other (<1% of total revenues) – Consists of hotel and transportation operations in Alaska

Revenues are also broken down by passenger tickets (65% of sales) and onboard/other (35% of sales).

In its recent second-quarter 2024 earnings report, Carnival delivered record revenues of $5.4 billion, with net yields significantly exceeding 2023 levels. 

The company also achieved all-time high booking volumes for future sailings at considerably higher prices compared to the previous year.

Source: Carnival Q2 Investor Presentation

Financials

Source: Stock Analysis

The pandemic hit the cruise industry hard.

Carnival added more than $23 billion to its $11.5 billion debt load to stay afloat.

Since then, revenues have exceeded pre-pandemic levels, as has gross profits.

However, operating income remains about $500 million, shy of its peak of $3.3 billion in 2019.

Interest expenses exploded from $206 million to peak at $2.1 billion in 2023.

Since then, the company’s been working down its debt load to $30.7 billion in the latest report.

Source: Carnival Q2 Investor Presentation

The company’s maturity schedule includes $1.2 billion this year, followed by $1.7 and $2.8 billion in subsequent years.

With their current profitability, Carnival doesn’t foresee this being a problem.

Valuation

Source: Seeking Alpha

All the cruise lines trade at similar multiples, save for Viking Holdings (VIK), a newcomer that recently debuted its IPO.

Notably, Carnival and Norwegian Cruise (NCLH) trade at higher price-to-cash multiples than Royal Caribbean (RCL), whose share price has exceeded pre-pandemic levels as the company took on the least amount of debt to survive.

Growth

Source: Seeking Alpha

Norweigein has shown strong growth as it’s begun to bring new ships online.

All the cruise lines forecast a strong 2024, though none expect to generate free cash flow.

The real test is how well the companies are booking into 2025 and beyond, which Carnival did well in Q2.

Profitability

Source: Seeking Alpha

While Carnival’s gross margins beat its peers, the EBITDA and EBIT margins aren’t nearly as impressive.

We can see the profitability gap between Royal Caribbean and the rest on these metrics, especially net income.

Our Opinion 6/10

While Carnival has made significant gains, its debt load is troublesome.

Current cash from operations comes in at $4.5 billion annually, while Capexx is $3.9 billion.

That leaves $600 million each year for debt repayments. At this rate, it will take 20 years to get back to prepandemic levels.

This will continue to drag on the stock for years.

We feel the stock is priced fairly, though it could have some upside should rates drop.