Investment Opportunity: Significant Dip in High-Growth Company's Shares for Potential Purchase
Cruise line shares took a hit during the pandemic but have bounced back impressively since the economy reopened. The trio of major cruise operators have doubled their returns starting from their pandemic lows, indicating a high demand for cruises and the industry's resilience in overcoming its biggest crisis to date.
Yet, Carnival Corporation (CCL 0.04%) remains the industry's largest player, with significant potential for growth as its shares are still 66% less than their pre-pandemic value in 2018.
Carnival has been regaining traction since the reopening, making it an appealing investment choice with a few compelling reasons to continue its upward trend.
Persisting demand
With elevated fixed costs and high operating leverage, cruise companies like Carnival thrive in profitable times, charging premium prices for berths and experiencing high marginal profits due to minimal variable expenses.
Despite challenging macroeconomic conditions, such as recessions, Carnival has managed to avoid those difficulties recently.
During its fiscal third quarter—reported on September 30—this company reported record results across several categories. Total revenue increased 14% year-over-year to $7.9 billion, exceeding estimates by $27 million. Operating income surged approximately 33% to $2.2 billion, while net income rocketed 60% to $1.7 billion. Adjusted net income also beat expectations by $170 million.
Carnival's success was driven by robust price growth and record net yields, or the gross profit per passenger. The buoyant demand for cruises has created a positive wave for the company, expected to persist till 2025, and Carnival has upped its guidance for the year once more. It now predicts adjusted EBITDA of $6 billion, a 40% increase from 2023 and higher than its Q2 forecast of $5.8 billion. Management also disclosed that its 2025 booked positions outpace 2024 and feature high-priced 2025 cruises.
While other travel industries, such as online vacation agencies, have reported decelerating growth, Carnival's momentum remains strong, positioning the stock for further growth.
Favorable macroeconomic factors
Although Carnival still carries a substantial debt burden from the pandemic, various economic indicators could aid its debt repayments. For instance, the Federal Reserve has started lowering interest rates and may continue doing so through 2024. This could enable Carnival to refinance its fixed-rate debt at reduced rates, thus saving money on its variable-rate debt. Currently, the company pays approximately $2 billion each year in interest expenses, so lower interest payments would offer a significant advantage to the business.
Reduced interest rates should also boost consumer spending and stimulate economic expansion. Furthermore, there is optimism that the Trump administration will pass an economic stimulus bill, which could support tax cuts and provide additional demand for cruises.
Attractive risk/reward ratio
Based on its projected adjusted EPS of $1.33, Carnival's stock trades at a P/E ratio of 18, with profits poised to increase in the coming year due to robust pricing and booking trends, and a favorable economic environment. In addition, the company plans to add one to two ships per year on average, expanding its capacity and driving financial growth. The opening of Celebration Key in 2024, a new Bahamas destination, should contribute to increasing demand. Its competitors also see an optimistic outlook as industries tend to move together.
Given its guidance on adjusted earnings per share and improvement in financials, reduced interest expenses, and an upbeat macroeconomic outlook, Carnival stock appears well-positioned for future increases.
Despite Carnival's outstanding financial performance and positive outlook, the company's finance sector has not fully recovered, with its shares still significantly underperforming their pre-pandemic value. Investors looking to capitalize on the cruise industry's resilience might find the current price of Carnival's stocks an attractive entry point for investing in this thriving sector.
As the cruise industry continues to bounce back post-pandemic, with major players doubling their returns and reporting record financial results, it presents a promising opportunity for investors looking to diversify their portfolios and capitalize on the industry's growth potential.
