Will Carnival Stock Continue to Sail in Smooth Waters?

Carnival Corp (CCL 4.69%) is booming as the pandemic fades into the distant past. Three years after Carnival returned to the seas, capacity has risen to 104% as of the second quarter of fiscal 2024 (ended May 31). The industry defines 100% capacity as two people occupying every cabin.

Additionally, little inventory remains for 2024, meaning the cruise line giant has not had to discount excessively to fill its cabins. With the company sailing in smoother waters, is now the time to add shares of Carnival stock?

The state of Carnival

Indeed, conditions for Carnival are better now than they have been in many years. With record bookings for 2025 sailings, its revenue prospects appear promising for the foreseeable future.

This is a dramatic turnabout, given that the Centers for Disease Control (CDC) completely shut down the cruise industry in March 2020 amid the COVID-19 pandemic. The shutdown was so severe that Carnival and its peers could not sail for the next 15 months. The financial shockwaves from that crisis are still reverberating around the cruise industry.

However, the outlook on Carnival’s massive debt, which surged during the pandemic when it could not sail, appears more favorable. Its total debt is now around $30 billion, an admittedly huge level, considering its shareholders’ equity is only $6.8 billion.

Still, that debt has dropped by around $1.2 billion over the last six months. Also, with only $426 million of that debt maturing this year, the company does not appear to face any immediate spikes in interest expenses.

Moreover, amid the rebound, Carnival has remained the world’s largest cruise line company, claiming almost 43% of all passenger traffic, according to Cruise Market Watch. This is far ahead of chief rivals Royal Caribbean at 26% and Norwegian Cruise Line Holdings at 9%.

Furthermore, Carnival forecasts capacity growth of nearly 5% this year, meaning the company’s high debt levels have not prevented it from funding additions to its fleet.

It should be said that consumer spending has shown signs of slowing in recent months, so investors should be on the lookout for changes. Nonetheless, given the abundant signs of strong demand for Carnival’s services, the company is on a steady path to growth.

How its growth fared

That growth took Carnival’s revenue to more than $11 billion in the first two quarters of fiscal 2024, a 20% increase from the same period in fiscal 2023. While that growth generated an operating profit, its interest costs led to a $118 million loss for the six-month period. Still, with a net income of $92 million in Q2, it appears on track for an annual profit.

Admittedly, the stock price may not have outpaced the S&P 500 for most of the previous year. However, it has earned higher returns since the low point of the bear market in late 2022.

Moreover, even if its 27 price-to-earnings (P/E) ratio deters some investors, it trades at only 15 times its forward earnings. Since Carnival is selling nearly all of its available capacity and continues to add ships, investors are likely to respond by bidding the share price higher.

Carnival stock going forward

Considering the current state of Carnival stock, it now appears to be an opportune time to add shares.

Although uncertainty about the overall economy could eventually affect Carnival, the company seems to have sailed past recession fears based on occupancy levels and bookings. Additionally, a forward P/E ratio of 15 and recent underperformance could position Carnival for further gains, allowing investors to leverage the stock’s low current valuation.