Is Carnival (CCL) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Unpacking the Risks and Rewards of Investing in Carnival Corp (CCL)

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Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Carnival Corp (CCL, Financial). The stock, which is currently priced at $15.27, recorded a gain of 1.53% in a day and a 3-month decrease of 2.82%. The stock's fair valuation is $33.22, as indicated by its GF Value.

Understanding GF Value

The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.


However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Carnival should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.35, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Carnival a hidden gem or a value trap?

Altman Z-Score Explained

Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.

A Glimpse into Carnival's Business

Carnival is the largest global cruise company, with 90 ships in service at the end of fiscal 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival's brands attracted about 13 million guests in 2019, prior to COVID-19, a level it should breach again in 2023.


Carnival's Low Altman Z-Score: A Breakdown of Key Drivers

A dissection of Carnival's Altman Z-score reveals Carnival's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Carnival's historical data, 2021: 0.22; 2022: 0.05; 2023: -0.02, we observe a declining trend in this ratio. This downward movement indicates Carnival's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.

The Bearish Signs: Declining Revenues and Earnings

One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Carnival, both the revenue per share (evident from the last five years' TTM data: 2019: 28.32; 2020: 24.42; 2021: 0.14; 2022: 5.15; 2023: 14.09; ) and the 5-year revenue growth rate (-32.8%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Carnival's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.


The Red Flag: Sluggish Earnings Growth

Despite its low price-to-fair-value ratio, Carnival's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Carnival's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations. Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.


Given the combination of Carnival's low Altman Z-Score, declining revenues, and earnings, it appears that the company might be a potential value trap. Despite its seemingly attractive valuation, the underlying risks associated with the company's financial health and performance cannot be ignored. Therefore, investors are advised to exercise caution and conduct thorough due diligence before making an investment decision.

GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.


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