Carnival Corporation Stock Is Beaten Down Now, but It Could 10X

Carnival‘s (CCL -1.60%) stock hit a record high of $66.19 on Jan. 29, 2018. At the time, the cruise line operator seemed like a stable long-term investment. From fiscal 2007 to fiscal 2017 (which ended in November 2017), its revenue grew at a compound annual growth rate (CAGR) of 3% as its earnings per share (EPS) rose at a CAGR of 2%.

Carnival maintained those slow but steady growth rates even as the Great Recession disrupted the expansion of the travel and leisure markets in 2008 and 2009. From fiscal 2017 to fiscal 2019, its revenue and EPS grew at CAGRs of 9% and 10%, respectively, as it expanded its fleet and attracted a new generation of younger travelers.

Image source: Getty Images.

Unfortunately, the global COVID-19 pandemic abruptly halted Carnival’s growth. Its revenue plunged 73% in fiscal 2020 and declined 66% in fiscal 2021. It also turned unprofitable in both years and took on more debt to stay solvent.

That rising leverage made Carnival a risky stock to hold as interest rates rose, and its stock sank to a 30-year low of $6.38 per share on Oct. 10, 2022. It’s more than doubled to about $15 since that fateful day, but it remains nearly 80% below its all-time high. Carnival’s exposure to macro headwinds and high leverage still make it a tough stock to love, but I believe it has a viable path toward generating a 10-bagger gain within the next 20 years.

Carnival’s core business is recovering

The pandemic severely disrupted Carnival’s growth in fiscal 2020 and fiscal 2021. But in fiscal 2022 and fiscal 2023, its revenue rose again, it gained more customers, and its occupancy rate hit 100% again. Its revenue of $21.6 billion in fiscal 2023 finally exceeded its pre-pandemic revenue of $20.8 billion in fiscal 2019.

Data source: Carnival.

In the first half of fiscal 2024, its revenue rose 20% year over year to $11.2 billion, its passengers carried grew 11% to 6.3 million, and its occupancy rate rose to 103%. Analysts expect its revenue to increase 15% to $24.8 billion for the full year.

Carnival stayed unprofitable on a generally accepted accounting principles (GAAP) basis in fiscal 2022 and 2023, but it narrowed its losses in both years. In fiscal 2024, analysts expect it to finally generate a GAAP profit of $1.5 billion, while Carnival expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise 40% to $5.8 billion.

Carnival stock is trading at low valuations

From fiscal 2023 to fiscal 2026, analysts expect Carnival’s revenue and adjusted EBITDA to grow at CAGRs of 7% and 17%, respectively. With an enterprise value of $46.6 billion, Carnival’s stock looks dirt cheap at just 2 times this year’s sales and 8  times adjusted EBITDA. However, its valuations are being compressed by three headwinds.

First, Carnival’s investors are worried about all of the debt it accumulated during the pandemic. It still held $27.2 billion in long-term debt at the end of the second quarter of fiscal 2024, which gives it a high debt-to-equity ratio of 4.0, and it spent $921 million on interest payments for that debt in the first half of the year.

Second, the escalating conflict in the Middle East is driving up oil prices. Those higher fuel costs could squeeze its margins and make it harder to break even. Lastly, fears of a recession are curbing the market’s appetite for travel and leisure stocks.

How could Carnival stock deliver a 10-bagger gain?

Carnival’s debt load is worrisome, but it already prepaid $6.6 billion of its long-term debt in fiscal 2023 and the first half of fiscal 2024. It also simplified its debt structure earlier this year to reduce net interest expenses by $55 million in fiscal 2024 and $85 million on an annualized basis. Some $2.2 billion of its long-term debt matures within the next 12 months, but its adjusted free cash flow (FCF) of $2.7 billion in the first half of fiscal 2024 indicates it can cover those payments.

Interest rate cuts could also make it easier for Carnival to further restructure its debt at more favorable rates. As for the Middle East, oil prices, and a potential recession, the company has weathered plenty of similar headwinds since its IPO in 1987, and I’m confident it will continue to do so.

If Carnival grows its adjusted EBITDA at a modest CAGR of 10% from fiscal 2024 to fiscal 2034, that figure would reach $15 billion by the final year. Assuming it trades at 15 times its adjusted EBITDA by then, its enterprise value would reach $225 billion — a near-five-bagger gain over the next 10 years. If it maintains that momentum by expanding its fleet and gaining new customers, it might just have a path toward delivering a 10-bagger gain over the next 20 years.