Tuesday, 2 January 2024
by Earn Media
Carnival (NYSE: CCL)(NYSE: CUK) is back in business, and its stock returned to market-beater status in 2023. It ended the year up 130%, way ahead of the S&P 500‘s 24% gain. All systems are go, but can Carnival do a repeat in 2024? Probably not, because the size of the rebound has already been so large. But you might want to buy the stock anyway. Let’s see why this is the most important thing to know if you’re thinking about buying Carnival stock.
Carnival is the world’s largest cruise operator, and it was a market-beating stock for years. It runs an efficient and popular business in a niche industry that targets an affluent clientele.
None of that mattered when a global pandemic caused travelers to push the pause button on cruises for several months. Carnival managed to keep its business operating by raising debt and equity when no sales were coming in. But it’s way past that now.
There’s all sorts of evidence that Carnival is back up to speed, and that it has a large growth runway as people sign up for its popular cruises. Customers are spending on travel and experiences in the aftermath of lockdowns, and this segment is growing despite inflation. As inflation moderates, it should expand even more. Carnival’s leading position in the cruise industry gives it leverage to benefit from trends in its favor.
Investors began to pile into carnival stock early in 2023. There was an overall market rebound driven by confidence in a rebounding economy, or at least by investors tired of seeing the market go down. That was reinforced by positive economic data trends and, in Carnival’s case, incredible performance.
In fiscal 2023 (ended Nov. 30), revenue increased 44% year over year and reached a record $21.6 billion. Net loss was $74 million for the year, but it posted a $1 billion-plus profit in the fiscal third quarter. Adjusted net income, which adjusts for things such as impairments and restructuring charges, was $1 million for the full year. Adjusted free cash flow was $2.1 billion.
Carnival also made great headway in paying off its debt. The debt reached more than $40 billion at its height, but the company paid off $6 billion in 2023. It has $5.4 billion in liquidity, and it plans to pay off the debt with its increasing cash from operations. Cash from operations was $4.3 billion in 2023, so while the debt is still high, it’s in a solid position to operate and pay off the debt over time.
Heading into the pandemic, Carnival’s debt was around $10 billion. That’s not unusual for large, established companies. So while I wouldn’t play down the increased debt, the new part was around $30 billion, and paying off another $20 billion or so brings it down to prepandemic levels. Between its strong growth drivers and well-run business, it doesn’t appear Carnival should struggle to pay it down and get on better financial footing. There’s always a risk that something could go wrong, but pandemics don’t happen every day.
That’s why the most important thing for investors to know right now about Carnival stock is that the recovery is over, and the extreme gains from the rebound have happened. I don’t think Carnival stock is likely to gain another 130% in 2024. Investors who betting on the recovery have been handsomely rewarded, but that phase is finished.
What’s likely to happen this year? There were $6.4 billion in customer deposits in the 2023 fourth quarter, a Q4 record, so we already know Carnival is set for a strong year. Management is also giving investors a clue based on guidance. It’s looking for 2024 adjusted earnings before interest, taxes, depreciation, and amortization to increase 30% year over year, and for net yields, another profitability metric, to increase by 8.5%. It’s also guiding for occupancy at historical levels. In other words, it’s back on track to operate at prepandemic levels.
Does that mean you shouldn’t invest in Carnival stock now? To the contrary, I think it’s a great time to invest in Carnival stock. Carnival is well positioned to continue growing, paying off its debt, and serving customers with an excellent experience. Even if 2024 has lower gains than 2023, it should be a great long-term stock to own for years.
Should you invest $1,000 in Carnival right now?
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