Carnival Stock: for risk-tolerant investors only (NYSE: CCL)

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Carnival Corporation Shares (NYSE: CCL)(NYSE: CUK) saw an impressive increase of almost 9% through August 26, compared to the end of July. That seems like a good sign for the hotel, vacation and cruise company, whose share price, unsurprisingly, has been hit hard during the pandemic. With the worst likely over for COVID-19, it seems tempting to buy the stock while it is still well below pre-pandemic levels. All in all, the following analysis reveals that the risks are too high to make it a safe investment.

Improve revenue, reduce losses

The venture is not without merit, however. For the six months ending May 31, 2022, Carnival reported revenue of $4,042 million, an increase of more than 54 times from the $75 million recorded in the same period of 2021. Its loss net was also down, albeit moderately, by 7.9% to $3,726. million compared to $4,045 million for the six months ended May 31, 2021. The improvement in its financials is driven by the normalization of post-pandemic conditions, with 86% of its cruise fleet back in service at the end of said period.

Continued growth expected

Looking ahead, Seeking Alpha’s analyst projections show that its numbers for the full year ending Nov. 30, 2022 are set to improve further. Revenue is expected to be $13.5 billion, up 7.1% from revenue of $1.91 billion seen in 2021.

By 2023, at least in terms of revenue, the company expects to finally be able to put the impact of the pandemic behind it. In his last declaration of results, Carnival said it expects revenue per passenger for the year to increase from 2019, the last pre-pandemic year. This is also corroborated by the opinions of analysts. Seeking Alpha’s projections call for a 5.5% increase in revenue in 2023 to nearly $22 billion from 2019 levels.

Favorable stock market valuations

In terms of market valuations, Carnival Corporation’s stock also has advantages. The popular Price/Earnings (P/E) ratio is not applicable in this case as it is currently in deficit. Instead, the alternative price-to-sales (P/S) ratio is instead considered relative to company peers. Two categories of peers were considered here. The first is its direct peers, which look at other cruise providers. The second is a broader comparison between companies in the travel industry.

It has a P/S ratio of 1.6x which makes it quite attractive. It is the lowest among its direct peers – Norwegian Cruise Line Holdings (NYSE: NCLH) and Royal Caribbean Cruises (NYSE: RCL). Even among travel industry peers, its P/S is only 1.5x higher than online travel stock Expedia (NASDAQ:EXPE). Its low P/S is most striking against hotel group H World Group (NASDAQ: HTHT), which is at 6.3x. This indicates that the stock may continue to rise, as it is relatively undervalued.

Comparison of market valuations between peers
Direct Peers – Cruise Suppliers
Store P/S EV/R
carnival society

1.67

6.63

Norwegian Cruise Line Holdings 2.37 7.33
Royal Caribbean Cruises

2.12

6.77

Travel Industry Peers

World Group H

6.29

1.37

Intercontinental Hotel Group

3.11

3.51

Hyatt Hotels Corporation

2.13

2.60

Expedia Group

1.50

1.66

Sources: Alpha Research, Yahoo Finance.

Note: All figures are as of August 26, 2022 close.

Also consider alternative assessments

But that’s only one side of the story. Another way to look at company valuation is to compare the value to income (EV/R) ratio of the company with its peers. EV gives a more complete picture, which indicates the value at which a company would be sold if it came to this.

It’s not a totally crazy idea. Companies that have suffered setbacks due to the pandemic are vulnerable due to their debt situation. For example, Cineworld (OTCPK:CNNWF) is considering bankruptcy filing because of his huge debts. Although it is in a different industry, cinemas, it still falls under the broader realm of leisure and entertainment, of which Carnival is also a part. She also suffered a big setback due to the lockdown effect, which resulted in her current state of financial hardship.

Keeping debts in mind, EV/R is a particularly important ratio in the context of Carnival, which also incurred massive debts during the pandemic years. Between 2019 and 2021, its debt has tripled to $33 billion. His EV/R is now 6.6x. There is some comfort to be drawn from the fact that among its direct peers, it is the lowest ratio (see chart above). At the same time, Carnival’s EV/R doesn’t compare favorably to the broader travel industry. It is much higher than that of H World Group and Expedia, which are at 1.4x and 1.7x respectively.

Recession-sensitive stock

The high EV/R might not have been such a big consideration if the broader macroeconomic conditions were firmly improving. Right now, we are seeing just the opposite. The U.S. economy is, at least to one extent, in a technical recessionconsidering that it has declined over the past two consecutive quarters.

Carnival Corporation revenue by geography

Income distribution

Carnival Corporation Quarterly Report

That’s bad news for cyclical stocks like Carnival, which thrive in robust economic conditions. A recession in the US is bad news right now for the company as it is still trying to get back on its feet as North America is its largest geographic revenue source. More than half of its income comes from it.

Only for risk-tolerant investors

In sum, we’re looking at a company that has shown some improvement in its finances since the end of the pandemic, but the road ahead doesn’t look easy at all. There could therefore be greater risk to financial projections than during more predictable periods. Still, a comparison of the market valuations of its direct peers, who are also cruise suppliers, reveals that Carnival Corporation is priced relatively favorably. Unfortunately, in the context of the wider travel industry, it still seems overpriced.

Ultimately, the decision whether or not to buy the stock comes down to an individual investor’s view of the overall outlook. If the US economy can emerge from tough times sooner rather than later, this cyclical stock has more than a good chance of getting back on track. But with inflation at multi-decade highs and rising interest rates, that looks doubtful, making its huge debts a bigger risk than usual. Carnival Corporation is a buy for highly risk-tolerant investors.

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