Stock markets made fresh all-time highs last week, with both the S&P 500 $S&P 500(.SPX)$ and technology-heavy Nasdaq $NASDAQ(.IXIC)$ up about 5% year-to-date.
The best-performing concepts is Cruise Concept. Considering the different perceptions of the stock, this time TigerPicks chose $Carnival(CCL)$ to have a fundamental highlight to help users understand it better.
$Carnival(CCL)$
Carnival Corporation is a global cruise and leisure travel company. The Company has a portfolio of cruise lines, including AIDA Cruises, Carnival Cruise Line, Costa Cruises, Cunard, Holland America Line, P&O Cruises (Australia), P&O Cruises (UK), Princess Cruises, and Seabourn. The Company's segment includes NAA cruise operations, Europe cruise operations (Europe), Cruise Support and Tour and Other.
Carnival Q2 Results Overview
In Q2, Carnival reported $6.3 billion in revenues, a 9.5% YoY increase from $5.8 billion, as ticket revenue increased 9.3% from $3.7 billion to $4.1 billion and onboard revenue increased 9.7% from $2 billion to $2.2 billion.
Carnival’s ability to grow its customers at higher pricing, as well as passengers’ expanding onboard spending is a testament to the stickiness of its offering, as these increases occurred at a time of volatility, with fears of a recession, sticky inflation, and geopolitical instability.
In terms of cash flow, Carnival reported 113.6% YoY growth in free cash flow from $722 million to $1.5 billion, at an FCF margin of 24.4% compared to 12.5% in the prior year.
Looking forward, Carnival expects net yields and adjusted cruise costs excluding fuel per ALBD to be up 5% and 3.6%, respectively, compared to last year. The company also expects to generate $6.9 billion in adjusted EBITDA and $2.69 billion in adjusted net income for the full year.
All of these figures are up from prior guidance issued in December 2024 and March 2025, a continuation of Carnival's trend of beats and raises. It is for this reason that I’m increasingly confident in Carnival’s ability to meet my $7.49 billion EBITDA target for FY 2025.
CCL stock updated FY 2025 guidance
A Long-Term Boon to Profitability
Recently, Carnival announced a new loyalty program, Carnival Rewards, replacing its current Very Important Fun Person (VIFP) program, and will take effect in June 2026. Per management in the Q2 earnings call, this new program will be cash flow positive at launch. However, it will have a temporary impact on yields and revenues due to the accounting treatment for recognizing revenue requiring a deferral of the ticket price paid by passengers equal to the value of future program benefits earned. The duration for this impact is expected to be 2 years, with a 0.5% impact on yields in 2026, a lower impact in 2027, and neutral in 2028.
Despite this short-term impact, I expect the new program to be a major boon to Carnival’s profitability. The main benefit Carnival stands to gain from the program is that it incentivizes passengers’ onboard spending, which carries high margins since it ties high-value perks with current spending. This would directly boost EBITDA and free cash flow, given Carnival’s operating leverage and its high EBITDA flowthrough rate.
Since this program makes it harder for passengers to reach and maintain the highest tiers, since passengers have to re-qualify every 2 years, Carnival can manage the number of high-tier members, potentially reducing the costs associated with providing exclusive high-value perks to its growing base. As is, Christine Duffy, President of Carnival Cruise Lines, stated the following in the press release announcing the program,
In short, the new program will prioritize high-value rewards for high-value customers instead of fixed benefits that may not align with current passenger value.
CCL Stock Valuation
At its current share price of $25.70, Carnival has an EV of $58.8 billion, meaning that it is trading at an EV/EBITDA multiple of 7.87, at my EBITDA target of $7.49 billion. In comparison, Carnival’s peers, $Royal Caribbean Cruises(RCL)$ $Norwegian Cruise Line(NCLH)$ $Viking Holdings Ltd.(VIK)$ are trading at EV/EBITDA multiples of 15.86, 8.47, and 14.41, respectively.
By applying a 40% weight to Royal Caribbean and Norwegian, and a 20% weight to Viking, due to its significantly lower debt load, my target EV/EBITDA multiple for Carnival is 12.61.
Risks
The main risk to my bullish thesis on Carnival is the macroeconomic environment. While Carnival has shown resilience in the face of recession fears and sticky inflation, prolonged uncertainty could impact consumers’ discretionary spending. Since cruises are a significant discretionary purchase, bookings, pricing, and onboard spending could all be negatively impacted.
Another risk to consider is fuel prices. So far, Carnival has seen its fuel costs decline compared to last year, however, the ongoing geopolitical tensions, especially in the Middle East, could lead to sudden spikes in fuel prices. This would have a direct impact on Carnival’s operating costs and put pressure on its margins.
Conclusion
In summary, I remain bullish on Carnival following its Q2 earnings. The company is seeing sticky demand for its cruises, as evident by the record Q2 revenues, driven by higher ticket prices and growing onboard spending by passengers. Carnival’s Q2 earnings also highlight its significant operating leverage, with cruise costs growing at a much lower rate compared to revenue growth. This leads me to become increasingly confident that Carnival could meet my $7.49 billion EBITDA target for this year.
At the same time, Carnival’s impressively high EBITDA flow-through rate of 94.8% in Q2 is a crucial element to its balance sheet deleveraging efforts, as it has already early redeemed $850 million of notes in the first half of the year, as part of its plan to reduce its debt load by $5 billion throughout 2025 and 2026. The company’s financial performance is also helping it to refinance its existing debt at lower interest rates as it refinanced $6.5 billion in debt in the first half of 2025, saving $163 million in annualized interest expenses, which has the potential to further improve its profitability profile.
On that note, the introduction of the new loyalty program, Carnival Rewards, could be a long-term tailwind to profitability since it ties perks with passengers’ spending. This could be an incentive to Carnival’s passengers to increase their onboard spending, which carries high margins. Moreover, Carnival Rewards could help the company reduce the costs associated with these perks by helping it manage the number of its high-tier members since they have to re-qualify every 2 years.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 18 Wall Street analysts offering 12 month price targets for Carnival in the last 3 months. The average price target is $29.57 with a high forecast of $35.00 and a low forecast of $21.00. The average price target represents a 8.47% change from the last price of $27.26.
Resource:
https://seekingalpha.com/article/4797201-carnival-an-undervalued-vessel-ready-to-cruise-higher
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