The largest cruise line operator is bigger bargain than you might think right now.
With peak summer travel season for cruise line operators fading into our wake, this might seem like an odd moment to consider Carnival (CCL -0.18%) as an investment. There are also some tropical disturbances swirling in the Caribbean that could potentially wreak itinerary havoc — or even cause outright sailing cancellations — in September.
Yet I still think this would be a great time to warm up to cruise line stocks in general and Carnival in particular. It operates the world’s largest fleet of cruise ships, and that niche of the travel industry is booming right now. Carnival stock may have already risen nearly 20% from its springtime low, but that doesn’t mean that you’ve missed the — umm — boat. Let’s dive into a couple of reasons why you may want to consider buying Carnival stock this month.
1. Earnings season comes early
Carnival operates on a different fiscal calendar than its peers. Its year wraps up at the end of November, so its fiscal third quarter concluded last week. It historically reports on that period in the final week of September. It’s also regularly Carnival’s strongest report of the year, covering the cruise-happy months of June, July, and August.
Expectations are high for the company after it posted blowout numbers last time out. Analysts expect to see revenue rising by 14% to $7.81 billion, 20% higher than the company’s pre-pandemic summertime record. Things get even more impressive on the bottom line. The consensus estimate among Wall Street pros is for a profit of $1.15 a share, a 34% year-over-year jump.
A 34% increase in earnings per share is impressive in any scenario. It gets even better when you consider Carnival’s momentum. It has been able to coast through analysts’ profit targets with ease over the last two years.
| Period | EPS Estimate | Actual EPS | Surprise |
|---|---|---|---|
| Fiscal Q4 2022 | ($0.87) | ($0.85) | 2% |
| Fiscal Q1 2023 | ($0.60) | ($0.55) | 8% |
| Fiscal Q2 2023 | ($0.34) | ($0.31) | 9% |
| Fiscal Q3 2023 | $0.75 | $0.86 | 15% |
| Fiscal Q4 2023 | ($0.13) | ($0.07) | 46% |
| Fiscal Q1 2024 | ($0.18) | ($0.14) | 22% |
| Fiscal Q2 2024 | ($0.02) | $0.11 | 650% |
Data source: Yahoo! Finance. EPS = earnings per share.
A string of seven beats in a row isn’t unusual. However, as the last column shows, the gaps are generally widening between where analysts are anticipating that Carnival’s profitability will land and where it actually does pull into port. The world’s largest cruise line operator has come through with double-digit percentage beats or better in each of the past four quarters. That’s something you like to see heading into a telltale financial update like the one that’s due at the end of this month.
Image source: Getty Images.
2. Carnival is cheaper than you think
You might expect that you’d have to pay a healthy premium for a stock that is perpetually cranking out “beat and raise” performances, but that’s not the case here. Carnival stock is trading 13% lower this year despite the outsized beats and ascending outlook.
It has only been profitable in two quarters since the start of the pandemic, but the future looks a lot brighter. Management’s guidance in late June called for a profit of $1.18 a share for the fiscal year that ends in November, pricing the stock at a mere 14 times this year’s earnings. Carnival hasn’t initiated a forecast for next year, but analysts foresee earnings per share of $1.55 in its fiscal 2025. Carnival is trading for a little more than 10 times that estimate, and we know what Carnival has been doing to Wall Street targets lately.
It’s true that Carnival had to issue a lot of debt during the arduous downtime when it wasn’t allowed to operate during the COVID-19 pandemic. Its enterprise value of $49.5 billion is more than double its market cap, so the multiples look less attractive if you zoom in — or out — to look at its net debt.
However, Carnival has retired $6.6 billion of its debt in the last five quarters. Just imagine how much more of that leverage it will be able to eliminate with its cash flow bursting through the portholes. With a record $8.3 billion in customer deposits for future sailings, it has strong bookings now as folks return to the high seas for their adventurous vacations. Given all that, September should be anything but dull for Carnival and its investors.
