Is It Finally Time to Sell This Cruise Line Stock?

March 09, 2023 at 06:40 AM EST

While Carnival (CCL) has been able to stage a post-pandemic recovery, it is yet to return to profitability like many of its peers. With high inflation, rising interest rates, fears of recession, and unenviable unit economics let’s find out if the cruise line stock would struggle to keep itself afloat. Read on…

Amid prevalent and persistent macroeconomic and geopolitical turbulence, Carnival Corporation & plc (CCL) faces an uphill task of keeping itself afloat in the near term. In this piece, I have discussed several reasons I am extremely bearish on this cruise line stock.

CCL is one of the frontrunners in the field of global leisure travel. The company runs its ships under various brand names, including Carnival Cruise Line, Princess Cruises, Holland America Line, P&O Cruises (Australia), Seabourn, Costa Cruises, P&O Cruises (UK), and Cunard. The company owns and operates hotels, lodges, glass-domed railcars, and motor coaches.

With the recent economic data coming in stronger than expected and anxieties regarding Friday’s strong jobs report, the Federal Reserve chair Jerome Powell cautioned that “the ultimate level of interest rates is likely to be higher than previously anticipated.”

Hence, an increased likelihood of a Fed-induced economic recession means cruise stocks such as CCL might be in for stormy seas ahead.

With post-covid recovery already trailing in some regions due to geopolitical and macroeconomic uncertainties weighing on consumer confidence, the company would find it more challenging to service the debt that has kept it on its feet over the past two years but is getting progressively burdensome with each FOMC meeting.

CCL’s stock has plummeted 13.8% over the past month and 33.7% over the past year to close the last trading session at $10.53. Despite the slump, the stock is still trading above its 50-day and 200-day moving averages of $10.47 and $9.84, respectively.

Let's take a closer look at CCL’s fundamentals.

Weak Financials

With the return of 90 ships to service and reboarding of 100,000 team members on its fleet, the fiscal year 2022 was a year of improvement from the covid-driven nadir during the previous two fiscal years. However, with fourth quarter occupancy 19 percentage points below and revenue 80% of 2019 levels, CCL’s financials still have some way to go.

CCL reported an operating loss of $4.38 billion for the entire fiscal year, while its comprehensive loss stood at $6.57 billion. As a result, the company’s loss per share came in at $5.16.

Poor Profitability and Inefficient Asset Utilization

CCL’s trailing-12-month gross profit margin of 31.31% is lower than the industry average of 35.23%. Also, the company’s trailing-12-month EBITDA and net income margins of negative 13.73% and negative 50.07% compare unfavorably to the industry averages of 11.34% and 4.62%, respectively.

Moreover, CCL’s negative trailing-12-month ROCE, ROTC, and ROTA stand out in stark contrast to the respective industry averages of 11.87%, 6.33%, and 4.09%.

Subdued Analyst Estimates

Analysts expect CCL to report a loss of $0.61 per share during the first quarter of fiscal 2023. The company is expected to report a loss of $0.08 per share for the entire fiscal year.

Moreover, CCL has missed the consensus EPS estimates in three of the trailing four quarters.

POWR Ratings Reflect Weakness

CCL has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. CCL has an F grade for Stability, as reflected in its beta of 2.23 and the vast spread between its 52-week high and 52-week low prices of $21.50 and $6.11, respectively.

CCL also has a D grade for Quality and Sentiment, consistent with its poor profitability and bleak outlook. Unsurprisingly, it is ranked last among four stocks in the F-rated Travel - Cruises industry.

Beyond what has been discussed above, additional ratings for Growth, Value, and Momentum can be found here.

Bottom Line

In addition to increasing the efficiency of operations, CCL reduced its capital expenditure in 2022 by over $500 million, compared to its previous guidance, to account for the current high inflationary environment. However, the company was also compelled to increase its advertising activities to enhance demand. This aptly reflects the conundrum in which CCL finds itself.

Moreover, Jerome Powell and his team at the Federal Reserve are targeting the inflation being driven by a red-hot services sector, which includes travel and leisure, albeit with a blunt tool such as broad interest rate hikes.

In view of the above factors and an increasingly uphill path to profitability, it may be wise to avoid CCL until its prospects become clearer.

Stocks to Consider Instead of Carnival Corporation & plc (CCL)

Unfortunately, the odds of Carnival outperforming in the weeks and months ahead are greatly compromised. However, there are many Shipping stocks with impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) stocks instead:

Teekay Corporation (TK)

Overseas Shipholding Group, Inc. (OSG)

StealthGas Inc. (GASS)

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CCL shares were trading at $10.33 per share on Thursday morning, down $0.20 (-1.90%). Year-to-date, CCL has gained 28.16%, versus a 4.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

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