The past six months have been a windfall for Carnival’s shareholders. The company’s stock price has jumped 43.3%, hitting $31.40 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Carnival, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Carnival Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Carnival. Here are three reasons why CCL doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Carnival’s 9% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the consumer discretionary sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Carnival’s revenue to rise by 4.1%, a deceleration versus its 9% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Carnival’s five-year average ROIC was negative 4.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.
Final Judgment
Carnival isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 15.7× forward P/E (or $31.40 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Carnival
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