The COVID-19 outbreak in 2020, the restrictions that followed, and a no-sail order marked the beginning of the slowdown of the cruise ship industry. Several cruise ship companies piled massive debt on their balance sheets to tide over the tough times involving no sailing. 

Although cruise operators made a strong recovery last year, they now face the risk of higher interest payments arising from the Fed’s aggressive rate hikes.

Carnival Corporation & plc (CCL) reported a strong year-over-year increase in revenue. However, its revenue and earnings are still far below the pre-pandemic numbers. 

Its revenue in the fiscal fourth quarter ended November 30, 2022, was 80% below the revenue it generated in the same period of 2019. Moreover, its occupancy in the final quarter of fiscal 2022 was 19 percentage points below the fourth quarter of 2019.

In the fourth quarter, CCL’s loss per share came in lower than analyst estimates. However, its revenue came 2.9% below the consensus revenue estimate. Its fuel expenses in the fourth quarter increased 105.7% from the prior-year period to $580 million. For the first quarter of fiscal 2023, CCL expects occupancy of 90% or slightly higher, 14 percentage points below 2019 levels.

On January 4, 2023, CCL announced its intention to raise prices for onboard add-ons. CCL said it would raise gratuities by $1.50 for both standard rooms and suites. Moreover, rates to access Wi-Fi onboard will be hiked from $17 per day to $18.70.

Although the price increases seem to be a step in the right direction, the company’s long-term debt at the end of fiscal 2022 stood at $31.95 billion. Minutes from the Fed’s policy meeting show that higher rate increases will remain in 2023 unless more progress is made to bring inflation down.

This will raise its debt servicing costs on its variable-rate debt in 2023. Also, borrowing would become expensive for the company. CCL expects its interest expense for fiscal 2023 to come in at $2 billion.

CCL has gained 20.5% in price over the past three months. On the other hand, the stock has declined 57.7% over the past year to close the last trading session at $8.95.

Here’s what could influence CCL’s performance in the upcoming months:

Disappointing Financials

CCL’s operating costs and expenses increased 56.4% year-over-year to $4.97 billion for the fourth quarter ended November 30, 2022. Its long-term debt increased 12.1% year-over-year to $31.95 billion. 

The company’s total current liabilities increased 1.9% year-over-year to $10.60 billion. Its adjusted net loss came in at $1.07 billion. Also, its adjusted loss per share came in at $0.85.

Mixed Analyst Estimates

CCL’s EPS for fiscal 2023 is expected to increase 100.4% year-over-year to $0.02. Its EPS for fiscal 2024 is expected to increase significantly year-over-year to $0.94. 

Moreover, its EPS for the quarter ended February 28, 2023, is expected to remain negative. Its revenue for fiscal 2023 and 2024 is expected to increase 73.2% and 10.7% year-over-year to $21.07 billion and $23.32 billion, respectively.

In addition, its EPS is expected to decline 151.4% per annum over the next five years. It has failed to surpass consensus EPS estimates in three of the trailing four quarters.

Mixed Valuation

In terms of forward EV/S, CCL’s 2.05x is 82.5% higher than the 1.12x industry average. Likewise, its 21.22x forward EV/EBIT is 66.1% higher than the 12.77x industry average. In addition, its 9.78x forward EV/EBITDA is 5.6% higher than the 9.27x industry average.

On the other hand, its 0.54x forward P/S is 37.1% lower than the 0.86x industry average. Likewise, its 1.48x forward P/B is 44.1% lower than the 2.65x industry average.

Poor Profitability

CCL’s trailing-12-month net income margin is negative compared to the 5.18% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 7.96% industry average. Furthermore, the stock’s 0.23% trailing-12-month asset turnover ratio is 77.1% lower than the industry average of 1.01%.

POWR Ratings Reflect Bleak Prospects

CCL has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CCL has a D grade for Quality, consistent with its poor profitability.

It has an F grade for Stability, in sync with its 2.14 beta.

CCL is ranked #2 out of four stocks in the F-rated Travel - Cruises industry. Click here to access CCL’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

Despite ending the year strongly after successful Cyber Monday and Black Friday sales, CCL’s prospects look bleak as the company is still far from returning to profits. The company’s booking volumes are finally returning to 2019 levels as more markets open for cruise travel and protocols are relaxed.

However, minutes from the Fed’s December meeting show higher rate hikes through 2023, meaning no respite from the higher interest rates. This is expected to affect CCL, as it is laden with debt, which could make it difficult for the company to service its debt. Given its weak financials and poor profitability, it could be wise to avoid the stock now.

CCL shares were trading at $9.17 per share on Friday afternoon, up $0.22 (+2.46%). Year-to-date, CCL has gained 13.77%, versus a 0.91% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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