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Value investors are perpetually in search of stocks trading below their intrinsic worth. Carnival Corp (CCL, Financial), with its current price of $17.63, has recently piqued interest with a 3-month increase of 13.86%. The stock has a GF Value of $32.56, suggesting it may be undervalued. Yet, a single-day loss of 2.65% raises questions about its stability and whether it could be a value trap.
Understanding the GF Value
The GF Value is a unique metric that aims to determine the intrinsic value of a stock. It is calculated considering historical trading multiples such as the PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow. Adjustments are made based on the company's past performance and growth, along with future business projections. The GF Value Line suggests a fair trading value for the stock, with the expectation that its price will fluctuate around this line. A stock significantly above this line might be overvalued, while one below could indicate a higher future return.
However, Carnival's low Altman Z-score of 0.62, coupled with a five-year decline in revenues and earnings, prompts a deeper analysis. These indicators may suggest that Carnival, despite its apparent undervaluation, could be a value trap, necessitating meticulous due diligence from investors.
Decoding Financial Health Scores
The Altman Z-score is a financial model developed by Professor Edward I. Altman in 1968, predicting a company's likelihood of bankruptcy within two years. It combines five financial ratios into a final score, where below 1.8 indicates high financial distress, and above 3 suggests low risk. Carnival's Z-score, significantly below the threshold, is a red flag for potential investors.
Carnival Corp (CCL, Financial): A Brief Overview
Carnival is the world's largest cruise operator, boasting a fleet of 90 ships under various prestigious brands. In 2019, before the pandemic, it attracted around 13 million guests. With a market capitalization of $23 billion and sales of $20 billion, Carnival has a global footprint. However, its operating margin of 2.19 and ROIC of 0.82, against a WACC of 11.28, suggest financial challenges, especially when considering its current stock price in relation to the GF Value.
The Concerning Altman Z-Score
Analyzing Carnival's financial ratios reveals a troubling trend. The Retained Earnings to Total Assets ratio has been in decline over the past three years: 2021: 0.17, 2022: 0.04, 2023: 0.01. This indicates Carnival's decreasing ability to reinvest or manage debt, adversely affecting its Altman Z-Score and signaling potential financial distress.
Warning Signs in Revenue and Earnings
Carnival's revenue per share has seen a downward trajectory over the last five years, with figures such as $29.52 in 2019 dropping to $15.37 in 2023. The 5-year revenue growth rate stands at a negative 32.8%. These declining revenues could be attributed to reduced demand or increased competition, both of which are significant concerns for the company's future.
Assessing Earnings Growth
Despite a favorable price-to-fair-value ratio, Carnival's declining revenues and earnings overshadow its investment appeal. Fundamentals need to be robust or improving for a low price to indicate a true opportunity. Without a clear strategy for recovery, Carnival's performance may continue to falter, potentially making its current valuation a value trap rather than an opportunity.
Conclusion: Navigating the Waters of Value Investing
Carnival's financial indicators, such as the alarming Altman Z-score and declining revenue, suggest that the company may be sailing into a value trap. While the stock appears undervalued, these underlying issues could capsize future returns. Investors should weigh these risks carefully and consider whether Carnival's current price is a discount or a distress signal.
GuruFocus Premium members can search for stocks with high Altman Z-Scores using the Walter Schloss Screen. For stocks with solid revenue and earnings growth, the Peter Lynch Growth with Low Valuation Screener is also available.
```This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
