Carnival Debt Weighs on Stock Even as Cruise Line Delivers Earnings Beat
By the typical cadence, an earnings beat usually represents a cause for celebration. Unfortunately for Carnival (US:CCL), tendencies are not guarantees. Subsequently, despite the cruise ship operator posting contextually strong numbers for its most recent earnings print, CCL stock stumbled out of the gate on Monday. Likely, pressures working against the consumer economy cloud the narrative for Carnival and the rest of the industry.
To be fair, CCL stock has delivered a remarkable performance since the beginning of this year. With both fears and restrictions associated with the COVID-19 pandemic fading globally, circumstances appeared auspicious.
Even with Monday’s near-8% sell-off, CCL stock has nearly doubled in equity value in the year to date. Further, analysts mostly still support Carnival, though that narrative appears to be eroding a bit.
Below are key factors to consider before boarding CCL stock.
Carnival Delivers Strong Numbers
Carnival released its earnings results for the second quarter of fiscal year 2023 on Monday morning. The cruise liner posted a U.S. GAAP net loss of $407 million, or 32 cents per diluted share.
On an adjusted basis, the earnings loss came out to 31 cents per share. However, this figure beat the better end of the March guidance range of a net loss of $425 million to $525 million.
Further, adjusted EBITDA for Q2 stood at $681 million, within the high end of the March guidance, which called for a range between $600 million and $700 million. Significantly, Carnival also posted a record Q2 revenue of $4.9 billion. As well, total customer deposits hit $7.2 billion, signifying an all-time high. Fundamentally, the company benefited from accelerating demand particularly for future sailings.
Worth mentioning is that cash from operations and adjusted free cash flow (FCF) were positive in Q2. Moreover, management expects continued growth in adjusted FCF to be the central catalyst for paying down Carnival’s debt over time.
“We reached a meaningful inflection point for revenue this quarter, with net yields surpassing 2019’s strong levels, and we achieved positive operating income, cash from operations and adjusted free cash flow,” stated Carnival CEO Josh Weinstein.
Interestingly, Weinstein also added that “[w]ith bookings and customer deposits hitting all-time highs, we are clearly gaining momentum on an upward trajectory.” Nevertheless, retail investors clearly expressed their lack of belief in the cruise ship operator’s prospects.
Economy Concerns Pressure
Although corporate enterprises aim for the record print like that Carnival recently delivered, the market values forward prospects over past victories. Unfortunately, the health of the consumer economy poses serious questions, likely contributing to the red ink cloud hanging over CCL stock.
As Carnival’s chief mentioned, paying down debt represents a top priority for the business. Unfortunately, the company had to take on a significant amount of it to stay afloat following the catastrophic impact of COVID-19.
For context, at the end of FY 2019, Carnival registered $9.675 billion in long-term (noncurrent) debt. By the end of FY 2022, this figure had soared to nearly $32 billion. As of the latest quarter, that’s not improved much; the balance sheet still shows long-term debt at $31.921 billion. In other words, it’s imperative that Carnival continue to fire on all cylinders moving forward.
To be fair, increased demand for future sailings helps assuage some concerns. Nevertheless, broader data such as the May jobs report opens room for skepticism. True, the headline print of 339,000 jobs added came in hotter than expected. Still, the unemployment rate also moved up by 0.3 percentage points to 3.7%.
In addition, the count of people who have been jobless between 15 to 26 weeks increased by 179,000 to 858,000 last month. Put another way, employers just aren’t as eager to bring on new employees. Given the number of mass layoffs that sprung with vigor in 2022, fewer people may have access to higher-paying jobs.
Though cruise ships tend to attract an older demographic, most industry patrons are of working age. Therefore, any loss of Carnival’s total addressable market could impose a disproportionately negative impact on CCL stock.
Analysts Weigh In
At the moment, analysts overall peg CCL stock as a consensus ‘moderate buy’ or ‘overweight’. According to data compiled by Fintel, eight analysts rate CCL as a ‘buy’ while five rate shares as ‘strong buy’. Nine experts are pensive about Carnival’s prospects, electing to rate shares as a ‘hold’.
While the pack is seemingly leaning toward optimism, four outright label it as a ‘sell’.
The average 12-months price target lands at $11.72, which implies (based on Monday’s closing price of $14.60) a downside risk of almost 20%%.
Overall, Carnival posted better-than-expected results for its fiscal Q2. On the flipside, investors have serious reservations about viability. Therefore, prospective market participants should adopt a cautious approach with CCL stock.
This article originally appeared on Fintel
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