Has the Tide Turned for Carnival Corp.?

Things are looking up, but not all the clouds are gone.

Travel company Carnival Corp. (CCL -0.14%), best known for its portfolio of cruise ship lines, has struggled since the early days of the COVID-19 pandemic, when it fought for financial survival.

As life returned to normal, people resumed booking cruises, but, like a 1,000-foot cruise ship, financial results have been slow to change course. However, the news has been improving recently, and the future is again bright for Carnival Corp. Financial results from the company’s most recent fiscal quarter gave investors reason to cheer.

First-quarter results show a booming business

Revenue for the fiscal quarter ended Feb. 29 was a record $5.4 billion. Bottom-line income increased more than $500 million from the year-ago quarter. Passenger booking revenue hit record levels during the quarter, driven by significantly higher pricing.

Rounding out the results was $7 billion in customer deposits, another first-quarter record. Carnival raised its estimate of full year net yields (a measure of net operating margins adjusted for passenger capacity per day) to 9.5%, an indication of expanding margins and improving profitability.

Last year’s results show Carnival is a stable company

Full-year 2023 results show a company operating at a normal level, fully recovered from the early pandemic impact. Carnival ended 2023 with book value of $6.8 billion, or $6.13 per share. Price-to-book per share was 2.42, higher than many value investors prefer, but within the fairly valued realm.

Carnival generated free cash flow of $997 million, a little less than $1 per share. Based on the most recent market close as of this writing, Carnival trades at 16.65 times free cash flow; once again, not exactly cheap, but not drastically overvalued either.

The biggest mark against the company is its overall debt level. Ship building is capital intensive, and Carnival borrowed tens of billions of dollars to stay afloat during the earlier days of the pandemic. Interest expense topped $2 billion for 2023. While interest coverage on net income was less than 1 (0.95), cash flows look better — cash interest coverage for 2023 was a more robust 3.0.

Most encouraging for investors was the progress the company recently reported in reducing long-term debt and improving the economics of its outstanding debt. Carnival was able to retire nearly $1 billion in debt, resulting in reduced interest expense. The company also received an increase of $400 million in borrowing ability, allowing for further flexibility. Carnival also received credit rating upgrades from rating agencies, which will help it further reduce interest expense in the future.

Carnival is on the right track, but further improvement is needed

The company has completed a hard-fought comeback. With stellar first-quarter results, there is plenty of hope for further improvements. However, the overall debt load remains uncomfortably high, and traditional valuation metrics indicate the company is fairly valued at best, and slightly overvalued at worst. Keep watch for further improvement of profitability, debt reduction, or price decline, but now is not the right time to invest.

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