Carnival: The Cruise Stock You Should Know About
Over the past two years, analysts have extensively covered industries severely affected by the COVID pandemic. The hospitality industry took a substantial hit. Within this sector, the foods and beverages segment and the travel and tourism segment have since been on the rise. Investors saw the major dip brought about by the pandemic as a way to enter into these stocks at a discount. Currently, several cruise line stocks stand at a similar ideal entry price. This article will evaluate Carnival Corporation (Ticker: CCL) by giving a brief overview of the company, as well as an industry overview, a look at their competitors, and finally, the opportunities that lie ahead.
To begin, it is important to go over a brief overview of Carnival Corp & plc. Founded in 1972, the company is a British-American cruise operator. Their U.S. division, Carnival Corp, is headquartered in Miami, Florida, and is trading on the NYSE. Their second company, Carnival plc, on the other hand, is headquartered in the UK and is trading on the LSE. Both of these companies comprise one entity; their financials are the same. Interestingly, they are "the only company in the world to be included in both the S&P 500 index in the US and the FTSE 250 index in the UK”.
Travel bans during the pandemic led to major decreases in profit for the cruise line industry. With almost no revenue and ongoing expenses for maintenance and payroll, all companies within the industry suffered negative operating cash flows. The stock price drop reflected their significant loss. If we take an average of the three largest cruise lines (based on their market capitalization), we see that from February 7 to March 20, the average drop in stock price value was 78%. Stock prices have slowly recovered as pandemic regulations have loosened, but the stock price for all competitors remains significantly lower than what it was three years back. From a qualitative standpoint, the future seems promising despite a looming recession. Most cruise lines report nearly full occupancy on their cruises, and some even exceed the 100% mark for booking. Combined with reduced COVID restrictions, this metric shows great promise for the industry’s revival.
Carnival Corp is the largest cruise line in the world. It accounts for 37.1% of all cruise revenue, and in 2021 it carried 42% of all cruise passengers worldwide. Despite this dominance, they still have substantial competition, including Royal Caribbean Group (Ticker: RCL), Norwegian Cruise Line (Ticker: NCLH), and Mediterranean shipping company (private). The main threat to CCL is the industry's low switching cost. If services are not properly provided or do not meet client expectations, they can easily switch to another cruise company. The limit to this switching cost involves the fleet size of competitor cruise companies. For instance, Carnival has 92 ships across nine different brands, Royal Caribbean has 60 ships, and Norwegian only has 17. In the industry, the acquisition and operation of new ships can take quite some time. Therefore, Carnival's position as a market leader should certainly hold in the immediate term. With its multiple brands and large fleet, Carnival is the most diversified in terms of its service offering, placing them in a more advantageous position capable of attracting other companies' lost clientele. Additionally, they are better hedged against regional risk. If their Asia segment sees a huge drop due to sudden regulation, they still have multiple other operational lines. This is not the case for most of their competitors.
The company is quickly approaching its pre-pandemic revenue and earnings figures. CCL will likely restore its typical figures considering a continuously increasing occupancy rate of 84% this summer, which represents a 21.73% increase compared to the previous three months. The rate at which its revenues are growing will contribute to this return to normal. From Q4 2021 to this past quarter (Q4 2022), its revenues have grown by 603.3%. By comparison, during the same reporting span, Royal Caribbean’s revenue grew by 468.98%. Additionally, CCL has been able to beat earnings the past 2 quarters.
One of the most prevalent risks for CCL stockholders is their high levels of debt. Since 2019 their long-term debt has tripled. Cruise line companies’ expenses are strongly tied to the prices of commodities such as fuel which are currently experiencing high levels of volatility. Additionally, the company's presence in a cyclical industry adds to its overall risk, especially considering the current economic downturn we are experiencing. Non-cyclical industries tend to be less severely affected by a weakening economy. These risks are the main reason why we have not yet seen a significant resurgence in Carnival’s value. Now, if we compare CCL to its close competitors, it could be said that they are a safer option. Since they outperform their competitors when it comes to liquidity metrics. In their most recent quarterly report, they boasted a higher current ratio, and their debt-to-equity ratio was significantly lower than that of their competitors. Considering their current trends in earnings and the major increases in occupancy rate, I believe that the benefits outweigh the risks when it comes to investing in CCL.
If they were to return to their regular levels of earnings (based on average earnings 3 years prior to pandemic), which as mentioned above is a very likely scenario, then they would have a P/E ratio of approximately 3.45 assuming the stock price remains at $9.97 per share as of April 3, 2023. A 3.8 P/E ratio is considerably lower than the industry average for cruise lines. This showcases that if Carnival can maintain their rapid recovery the stock is currently undervalued at $9.97 per share. Hence, this would be a good entry point for investors to buy into CCL.
In conclusion, the diversity and size of Carnival Corp & plc alongside their rapid recovery and promising occupancy rate percentages makes them one the best stocks within the cruise line industry. With the current stock price trading at 1993 levels of approximatively $9.97 per share now may be the perfect entry point for long-term investors who believe the company will prosper in years to come.