Will It Be Smooth Sailing For Carnival After 56% One-Month Rally?

Key Points

• Carnival reported its most recent quarter in late September, narrowing its loss from the year-earlier quarter. The company lost $0.58 per share on revenue of $4.305 billion. 
• Wall Street sees the company pivoting to profitability in 2023.
• Although pandemic travel hesitancy and restrictions are fading, a recession could put a damper on the cruise industry's recovery.

Do uptrends in Carnival Corporation NYSE: CCL, Royal Caribbean Cruises NYSE: RCL and Norwegian Cruise Line NYSE: NCLH mean the industry is finally reaching smooth seas, after more than two-and-a-half years of choppy waters? 

These stocks, like many others, are simply following the broader market higher. But there’s also some industry-specific strength at work. With indications that inflation is easing at the same time travelers may be more eager to jump onboard a cruise ship, could those stocks continue their rallies? AAA, which tracks data for all forms of travel, said Tuesday included cruise ships in its forecast calling for 1.4 million Americans will be going out of town for the Thanksgiving holiday. 

“With travel restrictions lifted and more people comfortable taking public transportation again, it’s no surprise buses, trains, and cruises are coming back in a big way,” said Paula Twidale, AAA’s Senior Vice President of Travel in a statement. “Regardless of the mode of transportation you have chosen, expect crowds during your trip and at your destination.”

While crowds may not be what all travelers desire, it’s good for business. Carnival reported its most recent quarter in late September, narrowing its loss from the year-earlier quarter. The company lost $0.58 per share on revenue of $4.305 billion. 

As MarketBeat earnings and revenue data show, the past quarter marked the best revenue performance since the quarter ended in April 2020, which included the beginning of pandemic restrictions. Revenue has been accelerating for the past six quarters, a promising sign. 

Analysts see Carnival posting a loss of $4.54 for the full year, narrower than last year’s. In 2023, Wall Street sees the company pivoting to profitability for the first time since 2019. 

However, there are some red flags. Even before the pandemic, Carnival’s shares were sailing slowly off a cliff. The stock peaked in January 2018, and had been trending lower for the two years prior to plummeting in the first quarter of 2020. 

In addition, Carnival has a massive debt load, which is a drag on earnings. However, if, as now expected, the Federal Reserve slows its pace of rate increases, that could bode well for Carnival as a debtor, as well as for its customers who may be more inclined to spend for leisure travel. 

Stock Trading At 2020 Levels

Despite rallying 56% in the past month, the stock is only now trading at levels seen in the first half of 2020, before a 2021 rally attempt and then another sharp decline.

Does that mean the current rally can’t hold? Not at all. Some analysts are concerned about inflation taking a bite out of consumers’ travel budgets, but there’s no sign of that happening yet.

Analyst data compiled by MarketBeat shows a consensus rating of “hold” on the stock, with a price target of $12.68, representing a potential upside of 13.62%. 

However, since early October, six analysts lowered their price targets on the stock. Just one, UBS, raised its target from $8.00 to $16.00.

The takeaway here is that analysts have some optimism about the stock, but it’s guarded, at this point. 

Rival Cruise Lines Also Posting Gains 

Fellow cruise lines Royal Caribbean and Norwegian are up 30% and 37%, respectively in the past month, as investors grow more optimistic about renewed growth as Covid-era restrictions and cruise hesitancy ease. 

There’s an apt saying here about it being a good thing to see a rising tide lift all boats. That certainly does seem to be happening in a somewhat literal sense. 

The three companies have similarities, in that all suffered sharp declines in terms of revenue, earnings, and price as a result of pandemic restrictions. In addition, all three are debt-laden, largely as a result of ships being docked during the pandemic, and the companies didn’t have the revenue to keep operations afloat. 

These could be tradeable rallies at the moment, but there’s room for caution if a global recession curtails travelers’ interest in cruising, just as Covid hesitancy is waning.