To The Moon

$Carnival(CCL)$

Carnival Cruise stock presents a compelling opportunity for investors due to the unique circumstances surrounding its recovery from the pandemic. The company underwent significant changes, taking on $20 billion in high-interest debt, but it is now rebounding, generating billions in cash flow. This creates a unique investment opportunity. In this analysis, I'll break down the key factors that make Carnival stock intriguing, assess whether it’s a buy, and present my proprietary discounted cash flow valuation model. I'll also evaluate its valuation using forward price-to-earnings and price-to-free cash flow metrics. Additionally, I'll highlight how the business is performing even better than before the pandemic—a surprising development.

Earning Overview

(CCL) reported its fiscal first-quarter 2025 earnings on March 21, 2025, demonstrating strong financial performance that surpassed analyst expectations. Revenue: Achieved a record $5.81 billion, exceeding analyst forecasts of $5.75 billion. ​Earnings Per Share (EPS): Reported an adjusted EPS of $0.13, significantly higher than the anticipated $0.02.

Full-Year Guidance: Carnival raised its adjusted EPS forecast to $1.83 from the previous $1.70, reflecting optimism about sustained demand and operational efficiency.

Fundamental Analysis

Revenue Growth and Higher Customer Spending Carnival’s revenue has surpassed pre-pandemic levels, with trailing 12-month revenue now at $25 billion compared to the previous $18-19 billion. Even more impressive, the company is generating higher revenue per customer, thanks to significant price increases and the inflationary environment, which has enhanced the value of its cruise ship assets.

A Strong Competitive Moat in the Cruise Industry Unlike new competitors, which face steep capital and expertise barriers, Carnival benefits from a strong competitive moat. The cruise industry requires substantial investment and operational know-how, making it difficult for new entrants to challenge established players like Carnival.

Operational Recovery and Resilient Leadership Operationally, Carnival has turned the corner, maintaining positive profit margins for over a year following the devastating pandemic losses. Surviving and thriving after such a crisis has strengthened the company’s management team, proving their ability to navigate unprecedented challenges. This experience adds confidence in their leadership.

Improving Return on Invested Capital Return on invested capital currently sits at around 5%, but as the company continues its recovery, this figure could climb toward 15-20% in the coming years. Since its capital base is already established with existing cruise ships, the focus remains on maximizing revenue from current assets rather than making large new investments.

Guidance

Industry-Wide Recovery Signals Strong Future Prospects The entire industry is in recovery mode, prioritizing efficiency and profitability over expansion, which bodes well for Carnival's long-term prospects.

Free Cash Flow

Analysts project $3-5 billion in free cash flow over the next few years. In the latest reports, Carnival has already begun generating strong cash flow, a significant turnaround from its losses during the pandemic. The company is focusing on operational efficiency and increasing revenue per passenger, helping boost free cash flow.

Impact of Free Cash Flow on Debt Reduction Carnival still has $30 billion in total debt, with $20 billion borrowed at high interest rates during the pandemic. Strong free cash flow allows management to pay down debt, reducing interest expenses and improving profitability. This virtuous cycle of debt reduction leads to a lower cost of capital, making the business less risky over time.

Risks and Challenges

High Debt Levels and Interest Expenses

Carnival carries approximately $30 billion in total debt, much of which was accumulated during the pandemic. Around $20 billion of this debt was borrowed at high interest rates, making it costly to repay. While management is paying down debt, this process could take 5-10 years, limiting short-term profitability.

Economic Downturn and Consumer Spending

The cruise industry is highly sensitive to economic conditions—if there’s a recession, discretionary spending on vacations may decline. Inflation and high interest rates could pressure consumers, making it harder for Carnival to maintain strong booking volumes.

Potential for Stock Volatility

Carnival’s stock beta is 2.67, meaning it is highly volatile compared to the broader market. Investor sentiment can shift quickly, especially if earnings disappoint or macroeconomic conditions change.

Market sentiment

Despite the strong quarterly performance and upward revision of annual profit forecasts, Carnival's stock experienced a modest decline of approximately 2% in early trading following the earnings release. This dip is attributed to broader market sentiments and specific concerns over the second-quarter outlook.

Positive Sentiment: Strong Revenue Growth and Recovery

Carnival’s Q1 2025 earnings beat expectations, with record revenue of $5.81 billion and a much higher-than-expected EPS of $0.13. Consumer demand for cruises remains robust, with record-high customer deposits of $7.3 billion, showing confidence in future bookings. Management has raised full-year earnings guidance, indicating confidence in continued financial improvement.

While Carnival’s fundamentals and demand trends are improving, investors remain cautious about debt, economic conditions, and stock volatility. Long-term investors see value in the recovery, but short-term traders remain sensitive to macroeconomic risks and earnings surprises.

Valuation

Carnival’s Intrinsic Value Suggests Undervaluation I wanted to share my discounted cash flow (DCF) analysis for Carnival Corporation, which reveals some interesting insights. Based on my calculations, the intrinsic value per share is $26, while the current market price is $21, suggesting that the stock is undervalued according to my DCF model.

Cost of Capital Expected to Decline One key factor to consider is the company's cost of capital, which I’ve estimated at 13%. This figure is likely to decline over the next few years as Carnival’s stock beta—currently at 2.67—reflects the heightened volatility from the pandemic period. As the company continues to execute well and stabilize, its risk profile should improve, leading to a lower cost of capital. Wall Street analysts also project strong cash flow growth, reinforcing this positive outlook.

Debt Reduction Strategy Strengthens Financial Position Another important aspect is Carnival’s debt load. The company holds $30 billion in total debt, with $20 billion of that borrowed at high interest rates during the worst of the pandemic. However, Carnival is now generating significant cash flow—expected to reach $3-5 billion in free cash flow—which management is actively using to pay down debt. As they continue reducing long-term debt, interest expenses will decrease, allowing for even greater free cash flow. This creates a positive cycle that could take 5-10 years to fully play out, gradually making the business less risky and more valuable over time.

Conclusion

From a valuation standpoint, the forward price-to-earnings (P/E) ratio of 10 suggests that Carnival is undervalued, while the price-to-free-cash-flow ratio of 21 indicates a fair valuation. Two out of the three metrics I analyzed point to an undervalued stock with unique catalysts for future growth. Given these factors, I rate Carnival stock as a buy and updated my recommendation accordingly on March 19th.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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