Carnival (CCL 3.17%) (DICK 3.34%) experienced its worst time when the pandemic forced its ships to go ashore. This period depressed revenues and increased costs and debt. The world’s largest cruise operator gradually resumed its cruises more than a year ago. In fact, today more than 90% of the fleet is in service.
However, carnival shares continue to suffer. They recovered some lost ground last year. But the growth did not last. Worries about higher interest rates and a weakening economy are weighing on stocks these days. They have lost about 50% year to date. Considering the future prospects, should you buy Carnival before it’s sold out? Let’s find out.
Taking on more debt
We’ll start by taking a look at the bad news first. Cruise lines including Carnival took on more debt during the earlier stages of the pandemic as their ships remained idle. Carnival’s total long-term debt has grown to more than $33 billion.
Today’s rising interest rate environment is not good news for companies with variable rate borrowing. For Carnival, rising rates could equate to a 12.4% increase in total interest expenses this year, according to EuroFinance.
Higher fees and a tough economy can also hurt consumers’ wallets — and that could keep them from booking cruise vacations. So today’s economic picture is not very supportive for Carnival and other cruise operators.
But not everything is completely bleak. Carnivals have come a long way over the past year. This progress shows in the latest earnings report.
Carnival’s cash from operations turned positive in the second quarter. Revenue was up almost 50% from the first quarter. This is important because it shows continuous progress. And booking volumes for future cruise dates were double those seen in the previous quarter. Carnival also said these volumes were the best since the health crisis began.
The company expects this trend to continue. Carnival expects housing gains to build until housing reaches “historic levels” next year. Carnival forecasts positive adjusted EBITDA for the third quarter of this year.
It helps the return of invested capital
Carnival is also making adjustments to reduce fuel consumption and better match its fleet to demand. The company has removed several smaller vessels from the fleet. And it has delivered nine bigger, more efficient ships since 2019. Carnival says the move should help the company return to profitability. And that should help increase return on invested capital (ROIC).
ROIC, which dipped during the earlier days of the pandemic, is an important point to watch. This financial metric is essential because it shows how much a company is earning from the investments it has made in its business.
CCL return on invested capital data according to YCharts
Now, let’s consider our question: Should you buy Carnival before it’s assembled? It depends on your comfort with risk. We do not yet know how long the current economic situation will last. And it is not favorable for cruise operators. That being said, it is a temporary situation. Times of higher interest rates and economic hardship do not last forever.
The carnival has made great progress over the past year. And capped cruise demand may still work in its favor. The company also has more than $7.5 billion in liquidity to back it up in times of trouble.
If you are uncomfortable with risk, it may be better to look at this investment from the dock. A sustained rally may not happen immediately. Further rate hikes or longer-than-expected weakness in the economy could hurt Carnival shares.
But if you’re an aggressive investor, you might want to take advantage of Carnival’s price today. Traded at less than 2 times sales. That compares with more than 12 earlier this year. So it might be a good idea to jump on board before this stock floats.
