Joel Carrillot
I appreciate stocks more and more Carnival Corporation (NYSE: CCL) The company has achieved actual operating profits since its capsize last year.Urgent need to do so after losses during pandemic In the subsequent accumulation of debt, these issues are both significant and worrisome.
The company is off to a strong start in 2024, and that appeal is growing quickly as an upward revision to the full-year outlook welcomes relief in a seasonally weak quarter.
A permanently damaged business case
Before the outbreak, Carnival’s business scale was approximately US$20 billion, operating profit was approximately US$3 billion, and profitability per share was approximately US$4. The company trades at $50, valuing its equity at $35 billion and its enterprise valuation at $47 billion because of the significant amount of debt (related to the asset-intensive nature of the business).
Revenue dropped to US$6 billion in 2020 and less than US$2 billion in 2021, resulting in huge operating losses of US$9 billion and US$7 billion respectively. Revenue recovers to $12 billion in 2022, but that’s still a huge loss, as all those losses mean net debt jumps to around $30 billion. Additionally, investors suffered a huge dilution, with the number of shares as high as 1.26 billion.
In 2023, the ship really turned, with the company reporting revenue of $21.6 billion, on par with pre-pandemic levels, and full-year operating profit of $2 billion. That’s almost enough to cover the annual interest expense on the net debt load. Furthermore, net debt actually fell to $28 billion, helped by strong customer deposits.
What’s more, the company expects EBITDA to likely improve to $5.6 billion in 2024, about $1.4 billion earlier than the year before, as those improvements could hit the bottom line almost one step at a time. Visibility of these revenues is also high, with two-thirds of trips already booked.
These continued improvements mean the investment story improves significantly, as break-even results can potentially translate into profits of around a dollar. This is compelling, driven on the one hand by strong demand, continued favorable demographic trends, but on the other by debt concerns, uncertain economic conditions and the upcoming capital spending cycle (which has been long delayed). after a while).
CCL stock will be trading in the high double digits by the end of 2023, and I worry that the strong price action itself may further lead to opportunistic equity raises, as I see little reason to participate in the stock in the high double digits.
settle down
After starting the year at around the $17 mark, Carnival shares have largely traded in a relatively narrow range of $15 to $17, and are currently trading at $16 and changing.
By the end of March, it was clear that Carnival was off to a good start in 2024.first quarter revenue yes Growth of nearly US$1 billion to US$5.41 billion was driven primarily by US$3.62 billion in passenger ticket revenue growth, plus US$1.79 billion in in-flight and other revenue growth. The company reported operating profit of $276 million, an increase of nearly $500 million from last year’s quarter.
However, that wasn’t enough to cover the interest, as a net loss of $214 million was reported. Net debt was reported at $28.5 billion, which is fairly flat as the company continues to attract more customer deposits, now approaching $7 billion.
The company’s operating results were very strong, with occupancy rising to 102% from 91% last year, which was a driver of strong performance in a seasonally weak quarter.
This year, the company remains optimistic, with adjusted EBITDA of $5.63 billion and net income growth of 9.5%, which is stronger than initially expected. This is driven by pricing, greater onboard spend and higher occupancy rates. The guidance does not include the estimated $10 million impact of the Baltimore Bridge disaster, which overall was relatively small.
Point improvements in production increased sales and earnings by approximately $200 million, while costs (excluding fuel) were $50 million lower than originally anticipated. Half of these benefits are offset by red sea route diversions.
Still, the company is on track to post earnings of around $1 this year as it takes some value-creating actions, including the redemption of notes with a hefty 9.875% coupon rate. In addition, capital expenditures of $2-3 billion per year over the next few years are only slightly higher than depreciation expenses, causing less headwinds from a cash flow perspective.
Now?
Amid it all, the future looks pretty bright, with earnings per share now two cents below initial guidance and less than a dollar above initial guidance and five cents above initial guidance. This looks pretty good, although based on forward guidance leverage will continue to remain above 5x, progress is slow.
Still, leverage remains an issue, and while demand is very strong and pricing is very strong, there are some concerns. This has to do with the affordability of cruise ships and ongoing concerns about ESG, although Carnival is slowly making some efforts in this area as well.
The current share price is $16, and the company’s equity valuation is $20 billion, which translates into an enterprise valuation of $48 billion, which is actually the same as the pre-pandemic enterprise valuation. Of course, the capital structure (composition of equity and debt) was completely different at that time.
Given all of this, I’m optimistic about Carnival Corp.’s progress here, as the company has essentially raised its guidance for the year while the stock has lagged. This makes me really more optimistic, because appeal is improving, but Carnival isn’t completely out of the woods yet.
In light of this discussion, I have become more bullish on Carnival Corporation and plc shares, but am still reluctant to put money here. Have a fair price-to-earnings ratio, but still require leverage and a cash flow profile. I just need a better risk reward profile before joining.
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