Shares of Carnival Corp. (CCL -0.14%) have been volatile since the pandemic restrictions eased.
The stock has recovered some of its losses during the crisis that shut down the cruise industry, but it's fallen this year as hopes for interest rate cuts have faded. Now, the sell-off looks like a good buying opportunity for value-minded investors. Here are four reasons why.
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1. Carnival is posting record results
Don't be fooled by the weakness in the stock price. Carnival's top-line performance is as strong as ever. In its recent first-quarter earnings report, Carnival posted record first-quarter revenue at $5.4 billion, plus record net yields and net per diems, metrics that measure the revenue and profit per passenger per day, saying they significantly exceeded 2023 levels.
Booking volumes also hit an all-time high, and management said prices were "considerably higher" than a year ago. Deposits reached a first-quarter record as well at $7 billion, and the company raised its guidance to reflect the better-than-expected bookings and revenue trends.
The strong revenue growth shows there's strong demand for Carnival cruises despite economic uncertainty and geopolitical tensions.
2. The bottom line is improving
Carnival has a big debt hole to dig out of after borrowing billions to stay afloat during the pandemic, but it's making progress on the bottom line as well as the top line.
In the first quarter, the company reported a generally accepted accounting principles (GAAP) operating profit of $276 million, compared to a loss of $172 million in the same quarter the year before. It also narrowed its interest expense from $539 million to $471 million thanks to debt reduction, leading to a nearly $500 million improvement on the bottom line to a loss of $214 million. Investors should be aware that the first quarter is seasonally weak and Carnival company is on track for a GAAP profit for the full year.
On the basis of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), the company is profitable and is targeting EBITDA of $5.63 billion for the year, which is a 30% improvement from 2023 and includes a modest impact from rerouting due to the conflict in the Red Sea.
3. Carnival is expanding
Carnival continues to build new ships, refreshing its fleet and expanding its capacity to meet growing demand. In the recent earnings report, Carnival said it ordered its first newbuilds in five years, adding two ships that will come online in 2027 and 2028.
It also just welcomed the Carnival Jubilee to its fleet, which took its maiden voyage in December 2023, and the Carnival Firenze is set to debut this spring.
The ships coming online now should help drive revenue and profits higher, and the newbuild purchases show the company's confidence in long-term demand for its cruises.
4. The stock is well priced
Valuing Carnival right now is a little tricky because of its debt burden and because it grew its share count significantly during the pandemic restrictions to raise funds.
However, according to most popular metrics, the stock looks like a bargain. On a forward P/E basis, the stock trades at a valuation of just 14, which looks like a great price for a company that's recovering from the pandemic. While that ratio doesn't include Carnival's debt, it does take the interest expense into account, showing that the company can service that debt and still deliver a strong profit.
Compared to its pre-pandemic price, Carnival is still down by more than two-thirds, and it seems reasonable to expect the stock to return to that level as it pays down debt and continues to benefit from strong demand.
Meanwhile, the Federal Reserve is expected to lower interest rates later this year, which would help Carnival refinance its fixed-rate debt and see lower rates on its variable-rate debt.
Over the coming years, there are a number of levers that Carnival can pull to grow the business, and that should make the stock a winner.
