Cruise operator Carnival Corp.'s (CCL, Financial) stock has doubled in value since the turn of the year as seasonal factors coupled with a broad-based market upturn provided the asset with significant tailwinds.
The recent surge means it is time to reassess the stock's prospects, given that it might have overshot its fair value. Let us delve into a few of the British company's most recent developments and discuss its valuation outlook to discover whether it remains in investable territory.
Earnings review and outlook
Carnival recently reported its second-quarter earnings, beating analysts' revenue estimates by $130 million and earnings per share by 2 cents. The cruise operator achieved $681 million in earnings before interest and taxes, a 50% increase from a year ago, translating into its highest number in nearly two decades.
During the three-month period, Carnival received significant support from customer deposits, which surged 26% quarter over quarter to $7.2 billion. Although at a seasonal peak, demand for the company's bookings is pent-up, which is accommodated by a surge in pre-cruise sales and the ongoing popularity of packaged deals.
Source: Carnival Corp.
Another critical feature of Carnival's most recent earnings release is its return on invested capital ratio of 12%. The ratio is at a multiyear high, suggesting improvements in working capital deployment. Moreover, a high return on invested capital ratio often communicates a competitive advantage, which is highly probable if the statistic is paired with its 47.88% market share.
Management's full-year expectations
Carnival's managerial team believes the company will have a successful full year, which could see it reach an EBIT figure of $4.25 billion, driven by an occupancy rate of nearly 100% and cost-cutting across the board.
Whether Carnival's latest results will sustain and transpire into overwhelming full-year results remains to be seen; however, its salient features suggest matters are on the up.
Bullish outlook on Wall Street
Carnival has received immense traction from Wall Street in recent months, earning praise from some of the world's most renowned market analysts.
Among those providing a bullish outlook was Jeffries analyst David Katz.
According to Katz, "The leadership change and the supply and demand recovery, and the resulting capital pivot, drive a significant shift from debt to equity value within the EV and should position the shares as more broadly investable, which could progress over several years. Despite the strong YTD performance, we believe the journey from a good trade to a long-term investment case remains ahead."
Furthermore, John Staszak from Argus Research upgraded Carnival from hold to buy as the analyst believes its latest capital expenditure cycle is starting to pay dividends.
In Staszak's own words: "Over the past three years, Carnival has disposed of 20 older, less fuel-efficient ships and replaced them with a dozen higher-yielding ships."
Although various Wall Street analysts might have contrarian views about Carnival, most headline reports suggest that sell-side analysts are upbeat about the stock.
Debt reduction and shareholder value
A critical risk that created a recent overhang on Carnival's stock was its debt build-up, which started during the pandemic and sustained throughout global reopenings. The company financed its operations via non-investment grade loans, yielding up to 10.75% during the past few years, causing much concern for the shareholders.
However, the company's operating results have improved in recent quarters, allowing it to reduce its high-yielding short-term debt. In addition, credit spreads within the U.S. are diminishing while talks of interest rate cuts are intensifying. Thus, Carnival's capital structure will likely align more favorably in the coming years.
Valuation outlook
Carnival is still working its way back to profitability after sustaining substantial operating demand and cost setbacks during the Covid-19 pandemic and the inflationary environment that followed. As such, the company's bottom-line valuation multiples provide little guidance at this stage. However, its top-line ratios are in great shape as the cruise operator's price-sales ratio of 1.33 is below its cyclical average of 2.14.
Despite Carnival 's bottom-line multiples being in slight disarray, a look-ahead model named the Yacktman forward rate of return suggests Carnival has an expected return of 24.67%, placing it within the 92nd percentile of all travel stocks. The Yacktman approach states that a stock's expected return can be measured by adding its nominal free cash flow yield to nominal gross domestic product growth; the approach is widely accepted by financial analysts and serves as a helpful indicator.
Concluding thoughts
Key operating metrics suggest Carnival's year-to-date surge is warranted, given its return to normality after a trying period influenced by slow demand during the pandemic and high input costs shortly thereafter.
The company's second-quarter earnings communicated that Carnival continues to garner momentum while reducing unwanted short-term liabilities. Moreover, it has earned approval from some of Wall Street's finest sell-side analysts, with the success of the latest capital expenditures cycle earning particular praise.
Although Carnival's valuation metrics have yet to recover from their Covid-19 slump, noteworthy indicators imply the stock remains undervalued and is set to achieve further gains in the coming quarters.
