Carnival is beating expectations, but its stock still doesn’t deserve a party

Carnival Corp. (CCL), which is trying to fight back after the cruise line was shut down during the pandemic, released slightly better-than-expected first-quarter results before the market opened on Monday. Revenue of $4.43 billion was $130 million above consensus estimates, while a quarterly loss of 55 cents a share was 5 cents better than expected.

While Carnival’s shares fell 5% on the day of the announcement, they were up 6% on Tuesday after Wells Fargo received a lukewarm upgrade from underweight to equal weight with a price target of $9. CCL closed at $9.33 on Tuesday.

There was good news in this earnings report, and that is that consumers want to cruise again. Carnival’s total customer deposits were $5.7 billion, a first-quarter high and eclipsing the previous record of $4.9 billion (set in 2019). At 91%, occupancy in the first quarter was seven percentage points above the prior-year figure. Adjusted EBITDA of $382 million was better than the company’s guidance of $250 million to $350 million released in December.

The elephant in the room, however, remains, which is the large amount of debt and equity the company has had to raise during the pandemic just to stay afloat.

Carnival ended the first quarter with $5.4 billion in cash and $35.1 billion in debt for net debt of $29.7 billion. At the end of 2019 (with Carnival’s fiscal year ending in November), just before the pandemic, net debt was $11 billion.

During the same period, Carnival’s outstanding shares rose 82% to $1.258 billion. This just isn’t the same capital structure as before the pandemic.

Carnival’s mountain of debt resulted in interest expense of $539 million for the quarter and $1.5 billion for the trailing 12 months. Interest expense for 2019 totaled $229 million. Carnival has cut its dividend during the pandemic, which should support cash flow, but the company still has a long way to go to emerge from the worst, especially for shareholders.

I have little doubt that the cruise business will spring back to life and ultimately eclipse its pre-pandemic successes. However, I’m still skeptical about Carnival’s prospects for its shareholders.

First, the dilution is significant, as is the debt and the resulting interest expense. Shareholders need to remember that if the company hits a bump or two on its way back to profitability, they’ll be last in line in terms of the capital structure.

I love a turnaround comeback story, but I still can’t get on board here. While consensus estimates for 2025 imply a price-to-earnings (P/E) ratio of 8, it’s not as cheap as it sounds for a company with so much risk and significant debt.

This is still an advanced trader only stock.

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