To The Moon

$Carnival(CCL)$

Carnival Corporation, a British-American cruise operator, boasts a fleet of over 90 vessels across nine cruise line brands, as well as a joint venture with China State Shipbuilding Corporation. As of December 20, the stock is priced at $25.10, with a market cap of $32.3 billion. Its median 10-year P/E ratio is 18.2, while its trailing 12-month P/E is 21, indicating it’s trading above its historical average. Key metrics include a price-to-cash flow ratio of 5.5 and a dividend yield of 0%.

Earning Overview

Revenue has grown at an average of 3.7% over the past five years, though the pandemic caused significant disruptions in 2020 and 2021. Carnival is recovering from these lows, with net income improving despite a 12.8% decrease overall.

Carnival reported fourth-quarter earnings of $0.14 per share, surpassing estimates of $0.08. This marks a strong recovery from a $0.07 loss per share a year ago.

Fundamental Analysis

The company has faced a staggering 97.1% increase in shares outstanding, diluting shareholder value significantly—a necessary move to avoid bankruptcy during the Corvid crisis.

The balance sheet remains a concern:

• Interest Coverage Ratio: 1.86 (poor)

• Quick Ratio: 0.26 (poor liquidity)

• Debt Ratios: Long-term debt-to-equity is 3.1, and overall debt-to-equity is 3.36 (both very high).

Guidance

Carnival Corporation (CCL) has provided an optimistic outlook for 2025, anticipating a 20% earnings growth compared to 2024. This projection is supported by strong booking volumes and higher pricing, with nearly two-thirds of 2025 already booked. The company expects a 4.2% increase in net yields compared to 2024's record levels.

Additionally, Carnival forecasts a reduction in interest expenses by over $200 million in 2025 compared to 2024, and over $500 million compared to 2023, due to well-managed debt maturities and improved leverage metrics. However, the company has provided an earnings per share (EPS) guidance of $1.70 for 2025, slightly below the consensus estimate of $1.74. Overall, Carnival's strong booking trends and strategic financial management indicate a positive trajectory for 2025, despite the slightly lower EPS guidance.

Free Cash Flow

Carnival's free cash flow has seen a turnaround, improving from -$1.3 billion to +$1 billion over five years. However, cash from operations is down 21.8%, and cash from investing has dropped by 46.8%. Cash from financing, on the other hand, has surged by 676.5%, primarily due to debt and equity issuance.

Technical Analysis

CCL exhibits bullish technical indicators, with the current price above key moving averages and positive momentum signals. However, the consolidation below the recent high suggests potential resistance. Investors should monitor these technical levels and market conditions closely.

Carnival is trading at a 1.34% discount to its 52-week high of $27.70, and a significant 63.14% discount from its all-time high of $72.70. Analysts have given mixed ratings, with some suggesting a “sell” due to valuation metrics, while others maintain a “buy” based on technical strength.

Support and Resistance Levels:

• Support: Identified near $24.24 and $21.92.

• Resistance: Observed around $25.99, $26.45, and $26.60.

Risks and Challenges

Carnival operates in an industry that requires significant capital investment, which limits returns to shareholders during economic downturns. As Warren Buffett has pointed out, companies in capital-intensive industries often deliver minimal returns after accounting for debt servicing. Carnival’s recovery is driven more by undervaluation than by strong fundamentals or operational excellence.

shows strong upward momentum and favorable market conditions, making it an attractive investment in the short term. With robust earnings, strategic investments, and positive booking trends, the long-term outlook also appears promising. However, potential risks such as insider selling and broader market volatility should be considered.

Debt Accumulation During the Pandemic To survive the pandemic when cruises were suspended, Carnival raised billions of dollars through debt issuance. The company's total debt increased from approximately $9 billion in 2019 to over $30 billion by 2024. Much of this debt comes with high interest rates, adding financial strain.

Comparison to Peers Carnival’s debt levels are notably higher compared to peers like Royal Caribbean and Norwegian Cruise Line. This disparity raises concerns about Carnival’s relative financial stability in a competitive industry.

Valuation

Using a 5% revenue growth rate over 10 years and considering multiples like earnings, operating cash flow, and free cash flow, the calculated fair value is $29.70. After applying a 15% margin of safety, the suggested buy price is $25.25, indicating the stock could be a buy under these assumptions. Analyst expectations place the fair value at $27.50.

While Carnival appears undervalued compared to its fair value, this could be a value trap rather than a true buying opportunity. The company’s heavily leveraged balance sheet, low interest coverage, and high capital expenditures make it a risky long-term investment.

Market Sentiment

Market sentiment for Carnival Corporation is generally positive, with strong demand in the cruise industry and favorable analyst ratings. However, recent insider selling may warrant caution. Investors should consider both the optimistic market outlook and insider activity when evaluating CCL.

Carnival is currently in a strong short-term uptrend, with a 48.63% potential increase projected over the next three months. Looking at a 12-month horizon, the stock could achieve gains of 55.49%, with price targets ranging from $26.70 to $35.40.

Many investors view Carnival’s debt burden as a long-term overhang, impacting valuation and stock price performance. Analysts remain cautious, citing the company's limited margin for error if economic conditions worsen or if demand for cruises weakens.

Conclusion

For investors seeking value, there are better opportunities available with stronger financials and long-term growth potential. Carnival might offer short-term gains if it returns to lower price levels, but it is not suitable as a long-term play. It could be likened to a "cigar-butt" investment—one that offers a final puff of value before it is discarded.

Ultimately, Carnival Corporation is a speculative play, and investors should conduct thorough due diligence before considering it. Its current appeal is primarily as a recovery story rather than a fundamentally strong business.

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