The tailwinds have been strong for Carnival (NYSE: CCL)(NYSE: CUK) and its fellow cruise line stocks. All three of the country's largest operators rose at least 7% on Wednesday, and Carnival shares have nearly doubled over the past year.
There's a lot to like about a giant in an industry with bullish momentum, but has Carnival been coasting too far for too long? Is it still a buy, or is it time for investors to disembark from this year-long pleasure cruise? Let's take a closer look to see if Carnival stock is a buy, sell, or hold in 2025.
investors were holding out for fresh financials to kick off the new trading week. The world's largest cruise line operator delivered a solid report for its fiscal third-quarter results on Monday morning, topping expectations on both ends of the income statement.
The strong performance isn't really a surprise. A record $8.3 billion in customer deposits at the end of May all but assured that there would be strong top-line results. A pair of analysts jacked up their price targets days before the report -- noting bullish operational catalysts including low fuel costs and strong passenger demand -- and made it easy to predict an eighth consecutive beat on the bottom line.
It was still a well-navigated report for the cruising bellwether's seasonally potent summertime report. Let's get up to the ship's bridge for a clearer view.
Buy Carnival
It wasn't a surprise to see cruise line stocks rally on Wednesday following the polarizing election results. Despite making inroads in attracting younger passengers, retirees remain the key target audience for the industry. President-elect Donald Trump's plan to eliminate the taxation of Social Security benefits on higher-income beneficiaries might give affluent retirees the means to cruise more in the future.
America has renewed its love for cruising, and Carnival is in a good spot with the world's largest fleet across its various brands. It served up another blowout quarter in September, the latest "beat and raise" for the industry bellwether.
Revenue rose 15% for the seasonally potent summertime quarter, just ahead of analyst expectations, and adjusted earnings per share (EPS) soared 62%. Carnival has topped profit targets consistently over the past two years, but the past few reports showed the cruise line operator landing well ahead of Wall Street's consensus.
| Period | EPS Estimate | Actual EPS | Surprise |
|---|---|---|---|
| Fiscal Q4 2022 | ($0.87) | ($0.85) | 2% |
| Fiscal Q1 2023 | ($0.60) | ($0.55) | 8% |
| Fiscal Q2 2023 | ($0.34) | ($0.31) | 9% |
| Fiscal Q3 2023 | $0.75 | $0.86 | 15% |
| Fiscal Q4 2023 | ($0.13) | ($0.07) | 46% |
| Fiscal Q1 2024 | ($0.18) | ($0.14) | 22% |
| Fiscal Q2 2024 | ($0.02) | $0.11 | 650% |
| Fiscal Q3 2024 | $1.15 | $1.27 | 10% |
Data source: Yahoo! Finance. EPS = earnings per share (adjusted).
Analysts can't keep up with the Carnival wave. The company has posted double-digit percentage beats on the adjusted bottom line for five consecutive quarters.
Carnival is putting its newfound wealth to good use. It hasn't reinitiated a dividend-payout policy to its shareholders, like its largest rival Royal Caribbean(NYSE: RCL), but it's paying down the gargantuan leverage it took on during the pandemic-mandated shutdown. Carnival's balance sheet still isn't exactly shipshape, but the company has repaid a whopping $7.3 billion of its long-term debt since fiscal 2023.
The near-term outlook is bright. Customer deposits for future sailings are 7% higher than they were a year earlier, another record for this time of year for Carnival. Margins are improving, and earnings growth should continue to outpace the slowing top-line gains.
The stock is also cheaper than you probably think for a stock that's nearly doubled over the past year. Carnival raised its guidance recently, now eyeing an adjusted profit of $1.33 a share in the fiscal 2024 year that ends later this month. The stock is now trading for a reasonable 18 times this year's earnings and an even more tantalizing 14 times next year's analyst target.
Image source: Getty Images.
Sell Carnival
It's not all sunny skies at Carnival. It still has nearly $30 billion in long-term debt, pushing its enterprise value to nearly double its market cap.
Cruise lines also have their highs and lows. Carnival is cruising right now, but investors saw how a global pandemic was enough to shut down operations for more than a year. This will be the first time that Carnival will post an annual profit since fiscal 2019. The closed-in nature of a cruising vacation makes it easy for an easily transmittable malady to spread onboard, so it won't need to be another full-blow COVID-19-like crisis to sap demand for potential passengers.
Carnival also needs the economy and geopolitical tensions to play nice to keep the record bookings coming. If Trump decides to go through with his promise of instituting a 25% tariff on Mexican imports, the heightened tension may cool down passenger interest in now-popular Mexican destinations.
Finally, even if cruise lines can sustain their bullish momentum, it doesn't mean that Carnival will be the best play. Royal Caribbean commands the largest market cap and has been the bigger winner coming out of the pandemic. Royal Caribbean has historically produced stronger growth and healthier profit margins and returned to profitability a year before Carnival. If you only want to own one cruise line stock, it might not be Carnival.
Hold Carnival
There are more bullish than bearish catalysts for Carnival right now. Even the low valuation -- at 14 times forward adjusted earnings -- will likely be conservative, as analysts continue lowballing the operator's profit potential.
It wasn't just extra debt that Carnival took on to finance operations during the prolonged cash-draining hiatus. A lot of new shares were issued, and at low price points. Thankfully, Carnival is returning money to its shareholders through buybacks in recent quarters. A dividend can come sooner rather than later.
The overall value in Carnival stock is compelling here, making it more a buy than a sell or even a hold. This was an industry that many investors left for dead in 2020. Now, Carnival just rattled off a quarterly profit of $1.735 billion. It might not be the best cruise line stock, but it could still be a strong market beater in 2025.
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Rick Munarriz has positions in Carnival Corp. and Royal Caribbean Cruises. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
