Let's buy carnival stocks. The unstable market environment will pass

The carnival has been hit by rough seas, but the recent crash after financial results seems like a perfect opportunity to book a cruise with the company's stock at a bargain price.

At first glance, Carnival's first quarter financial results, which were announced on March 27, were supposed to be a reason to toast at the Lido Deck. The company recorded a loss of 14 cents per share, which was higher than the loss of 22 cents, which is the company's guidance, and the loss of 18 cents expected by analysts. Furthermore, Carnival announced that record reservations have been made this quarter, and prices have also risen drastically.

But it wasn't all good news. Sales recorded a record high of 5.41 billion dollars, a 22% increase from the same period last year, but it fell slightly short of the consensus of 5.42 billion dollars. However, Carnival also announced that the profit for the current fiscal year was 98 cents, which is 5 cents higher than conventional guidance, and that it will be a surplus since before the pandemic. Shares fell 4.3% in the week ending March 29th.

A number of issues probably drove down stock prices. First, the company has stated that the collapse of the Francis Scott Key Bridge in Baltimore will lead to a loss of profits of as much as 10 million dollars, but considering how recent this tragedy is, it is not factored into the Carnival guidance. Furthermore, there is also the fact that Carnival's stock price rose 11% in the month before financial results, which was about 3 times the rate of increase in the overall market, so there was almost no room for surprises.

Currently, the stock price has fallen 17% year to date to $15.34, but Carnival stocks seem worth buying. McCauley analyst Paul Golding said that Carnival “successfully weathered unexpected headwinds and had another strong quarter,” and in response to these results, the target stock price was raised by 2 dollars to 24 dollars.

Carnival is long overdue among the three major cruise operators, including Royal Caribbean Group and Norwegian Cruise Line Holdings. The cause may be that there have been accidents that have become a big topic of conversation in the past, such as the 2012 Costa Concordia accident, that there are slightly fewer passengers, that ticket price growth is slow, or that debt levels are high - the total amount of debt at the end of the 2023 fiscal year was about 30 billion dollars, which is at a high level even by cruise company standards.

Carnival is working hard to resolve these issues. The company generated an adjusted unadjusted cash flow of 1.4 billion dollars in the most recent quarter and repaid approximately $1 billion of debt that will initially mature in 2027. This also includes remaining debts with second mortgages, which tend to have high interest rates. The path to investment grade ratings is progressing smoothly.

“Over the next few years, Carnival should generate billions of dollars of free cash flow and use it to repay debts,” says Chris Kissein, a credit analyst at New Fleet Asset Management, which holds Carnival bonds. “Carnival wants to return to an investment-grade rating, and it should be able to do so without a recession.”

There is still work to be done at Carnival, but improvements are also underway to close the gap with competitors. In the first quarter, the carnival's net “yield” (an index of passenger consumption value after removing exchange rate fluctuations) increased 17% from the same period last year, surpassing growth in Norway Japan, and the occupancy rate of guest rooms rose 11 percentage points, surpassing the Royal Caribbean.

Merius Research analyst Connor Cunningham points out that “the demand environment continues to be strong, and balance sheet repairs are progressing in real time.”

Carnival should also continue to have the power to determine prices. Normally, investors would begin to worry about new cruise ships entering service and increasing capacity. However, it took years to build a passenger ship, and the carnival just placed its first post-pandemic order in February. In other words, Carnival will continue to operate close to 100 passenger ships that are already at sea until 2027. Other cruise lines are also holding back on growth.

“In the case of cruise companies, forecasts can be made up to 1 year or so ahead, so we know there will be demand for 1 year in 2024,” says Kissein. “And in 2025 and 2026, capacity growth across the industry is likely to be more moderate than normal.

The carnival must continue to deal with global issues. Carnival previously announced that full-year results would decrease by 7 to 8 cents per share due to disputes in the Red Sea, but the Baltimore bridge collapse accident (10 million dollars in damages required) is probably 1 cent per share, which doesn't seem that big.

Carnival, which is traded at around 13.8 times the future profit, is on par with Royal Caribbean, but it is 15.4 times cheaper than Norwegian. Profit of about 1 dollar per share will be obtained in 2024 from balance of balance in 2023, and profit per share is expected to grow by 42% in fiscal 2025, which seems to be a reasonable level considering that it is faster than the two major competitors.

Ivan Fiennes, the research director of Tigress Financial Partners, recently raised Carnival's target stock price by 2 dollars to 25 dollars, and argued that “the recent return in stock prices (...) is a big buying opportunity.”

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