A Few Years From Now, You’ll Wish You Bought This Undervalued Stock
Some of the biggest bargains out there may not appear to be so cheap at first glance. Let’s walk the gangplank to hop on Carnival (CCL) for a closer look at the world’s largest cruise line operator. It may initially seem more like a port of put than a port of call.
Carnival has only been profitable twice in the past 18 quarters. It’s trading for 26 times trailing earnings, and given its debt-bloated balance sheet, that multiple jumps to nearly 60 if you swap out market cap for enterprise value as the numerator.
Carnival also isn’t exactly out of favor right now. The shares have moved higher for seven consecutive trading days, rising 15% in the process. The stock has more than doubled — up 128% — since the start of last year. However, head to the front of the ship and the future journey can be even more promising than the recent past. Carnival is cheaper than you think, and in a few years, you might wish you had bought this undervalued stock.
Love, exciting and new
Carnival is the parent company behind other cruise lines, including Princess, the fleet that became famous in the 1980s as the setting of the iconic The Love Boat television series. It hasn’t always been a pleasure cruise for Carnival. The industry itself was a heartbreaker for investors a few years ago at the onset of the COVID-19 crisis. Unlike other travel sectors that were able to get back up and running after establishing new safeguards, it took more than 15 months before the first U.S. cruise was able to set sail.
The red ink was deep and substantial until recently. Carnival and its peers had to load up on debt at high rates or sell new shares at low prices to stay afloat. The industry is finally back in its honeymoon period with the fans of watery escapes.
At the end of May, Carnival was holding $8.3 billion in customer deposits for future sailings, an all-time high that shattered the previous high-water mark of $7.2 billion. It reports fiscal third-quarter results at the end of this month for what is seasonally its most potent period. It’s time to start looking forward instead of dwelling in the aft section of this vessel.
Come aboard; we’re expecting you
Carnival’s guidance back in June was revised higher. It now expects to earn $1.18 a share for this fiscal year, which ends in a little more than two months. Analysts see Carnival posting a profit of $1.56 a share next year. The math is kind, as the stock is trading for less than 12 times forward earnings.
The bullish argument for Carnival as a cheap stock gets better. Wall Street has been slow to come around to the industry’s recovery. Carnival has posted double- or triple-digit percentage beats in every quarter over the past year. No one should be surprised if Carnival delivers another period of blowout results and pushes its guidance higher in two weeks, especially with fuel prices continuing to move lower since its last update. Put another way, Carnival is probably trading for a lot less than 12 times what it will ultimately earn in fiscal 2025.
Bears can rightfully point to Carnival’s problematic leverage, but now that Carnival is cruising in the right direction, it’s working on turning that mountain into a molehill. It has bought back $6.6 billion of its debt over the last five quarters.
The water is inviting from several other angles. The Fed’s long-overdue push to cut rates this week won’t just make it cheaper for more people to finance future Carnival sailings. Carnival can use its improving credit quality and falling rates to refinance its debt at more attractive levels. A falling U.S. dollar will also strengthen the value of its international business.
Some of the macro factors that may pinch the rest of your portfolio — like a potential increase in the corporate tax rate — will make Carnival look even better on your scorecard. Cruise lines make most of their revenue on international waters, and its income tax rate has been less than 3% of its total revenue in each of its five previous profitable years.
Even if you’re a landlubber, you owe it to yourself to explore the warm and inviting waters of cruise line stocks. Unlike The Love Boat‘s theme song, love doesn’t have to be life’s sweetest reward.
This article was originally published on this site