After its below-par performance with the lingering impacts of the pandemic, cruise stock Carnival Corporation (CCL) made a strong recovery as travel resumed after the restrictions were lifted worldwide.

Despite the sharp pickup in bookings and operations in the third quarter, CCL missed Wall Street EPS and revenue estimates. Analysts expected a loss per share of $0.14, but the company reported a wider loss per share of $0.58. Its revenue missed the consensus estimates by 12.7%.

The company’s occupancy in the third quarter increased by 15 percentage points sequentially. Its available lower berth days (ALBD) for the last quarter rose 74% sequentially to 21 million. Since it announced relaxed protocols in mid-August, the company’s booking volumes for all future sailings are significantly higher than the 2019 levels.

Cruise companies are burdened with massive debt, which they took on during the pandemic to keep themselves afloat. Therefore, they are now struggling with rising interest rates.

The company’s long-term debt in the third quarter has ballooned to $28.52 billion. The Fed’s rate hikes are expected to worsen conditions for the company as the rate on CCL’s floating rate debt would rise.

CCL announced that it would issue $1 billion in new debt as it tries rolling over the higher-interest debt taken during the pandemic. The proceeds from this debt will be used to pay off the previous higher interest-rate loans and also be used for general corporate purposes.

Moreover, CCL’s fuel expenses soared 267% year-over-year to $668 million in the last quarter, while its payroll expenses rose 50.1% year-over-year to $563 million.

Its cumulative advance bookings for the current quarter are below the historical range. Moreover, many experts expect travel demand to lag during the holiday season due to high inflation and recession worries.

On November 29, 2022, CCL announced record Cyber Monday sales, 50% above the volume for Cyber Monday 2019, indicating a busy 2023 for the company.

CCL President Christine Duffy said, “The Cyber Monday sale activity showed consumer demand across the fleet, and we were particularly pleased with the booking activity for Carnival Venezia’s new year-round service from New York and our new extended six-month program for Carnival Magic out of Norfolk.”

CCL’s stock has declined 51.9% in price year-to-date and 43.7% over the past year to close the last trading session at $9.68. It is trading 59.4% below its 52-week high of $23.86, which it hit on February 10, 2022.

Barclays dropped CCL’s price target from $14 to $10 and set an “overweight” rating. Credit Suisse Group also dropped their price target on CCL from $29 to $22. Also, Morgan Stanley dropped their price target from $7 to $6 and set an “underweight” rating.

Here’s what could influence CCL’s performance in the upcoming months:

Disappointing Financials

CCL’s operating costs and expenses increased 76.1% year-over-year to $4.58 billion for the third quarter ended August 31, 2022. Its adjusted net loss came in at $688 million. The company’s loss per share came in at $0.65. Also, its current assets declined 16.8% to $8.43 billion, compared to $10.13 billion as of November 30, 2021.

Mixed Analyst Estimates

CCL’s EPS for fiscal 2022 is expected to remain negative. Its EPS for fiscal 2023 is expected to increase 110.3% year-over-year to $0.48. Moreover, its EPS for the quarter ended November 30, 2022, is expected to remain negative. Its revenue for fiscal 2022 and 2023 is expected to increase 546% and 73.4% year-over-year to $12.33 billion and $21.37 billion, respectively.

In addition, its EPS is expected to decline 151.4% per annum over the next five years. It has failed to surpass consensus EPS estimates in each of the trailing four quarters.

Stretched Valuation

In terms of forward EV/S, CCL’s 3.28x is 195.5% higher than the 1.11x industry average. Likewise, its 0.98x forward P/S is 13.5% higher than the 0.87x industry average.

Poor Profitability

CCL’s trailing-12-month net income margin is negative compared to the 5.05% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 7.89% industry average. Furthermore, the stock’s 0.18% trailing-12-month asset turnover ratio is 82% lower than the industry average of 1.01%.

POWR Ratings Reflect Bleak Prospects

CCL has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CCL has a D grade for Value, consistent with its stretched valuation.

It has a D grade for Quality, in sync with its weak profitability. Also, its 2.14 beta justifies its F grade for Stability.

CCL is ranked #3 out of four stocks in the F-rated Travel - Cruises industry. Click here to access CCL’s Growth, Momentum, and Sentiment ratings.

Bottom Line

Despite impressive Cyber Monday sales, CCL’s prospects look bleak as the company is still far from reporting profits. Although the Fed has indicated that it would slow down the pace of rate hikes, the final level of interest rates is expected to be higher than predicted. This is expected to affect CCL, as it is laden with debt, which could make it difficult for the company to stay afloat.

Given its weak financials, stretched valuation, and poor profitability, it could be wise to avoid the stock now.

CCL shares rose $0.03 (+0.31%) in premarket trading Tuesday. Year-to-date, CCL has declined -51.74%, versus a -14.88% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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