Carnival's Business Has Been Doing Well: Why is Its Stock Still Underperforming?
Carnival (CCL) has been generating strong results in recent quarters, but its stock is still nowhere near its levels before the pandemic, when shares were trading above $50.
Carnival (CCL) has been generating strong results in recent quarters, but its stock is still nowhere near its levels before the pandemic, when shares were trading above $50. Investors still appear to be hesitant to load up on the stock. After all, if a recession is looming and interest rates don't come down, it could be a tough combination for a travel stock with a high debt load.
But are those fears overblown? Can the stock prove skeptics are wrong and be a great buy right now? The company has great insight into its bookings because consumers need to secure spots ahead of time. According to its investor presentation, Carnival says that at any given time, approximately 50% of its demand for the next 12 months is already booked. And 55% of its guests are repeat customers.
This provides good visibility for the company into what demand will be and how strong sales are going to be. If there are warning signs ahead for the travel industry, Carnival will know about them fairly early on, giving it time to adjust accordingly. And as of now, there aren't any looming warning signs for investors to worry about.
When the company last reported earnings in June this year, it raised its FY guidance for fiscal 2024 (which ends in November), citing “strong demand” for cruises. This is even as the company reported record second-quarter revenue totaling $5.8 billion for the period ending May 31, which rose by 18% year over year.
The stock could soar once interest rates start coming down. Carnival's growth rate looks great, but there's just one problem — interest expenses. The company has more than $27 billion in long-term debt on its books.
It's been chipping away at that, but it's still a huge albatross around what would otherwise be strong earnings numbers. This is best illustrated with the following chart that shows the company's operating income and how much interest costs take away from that.
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