Carnival Corporation stock is down now, but could 10x

Carnivalhis (CCL -1.67%) the stock hit a record high of $66.19 on January 29, 2018. At the time, the cruise line operator looked like a stable long-term investment. From fiscal year 2007 to fiscal year 2017 (which ended in November 2017), its revenue grew at a compound annual growth rate (CAGR) of 3% as its earnings per share (EPS) grew at a CAGR of 2%

Carnival maintained those slow but steady growth rates even as the Great Recession disrupted the expansion of the travel and leisure markets in 2008 and 2009. From 2017 to 2019, revenue and EPS grew at CAGRs of 9% and 10%, respectively. as it expanded its fleet and attracted a new generation of younger travelers.

Image source: Getty Images.

Unfortunately, the global COVID-19 pandemic brought the growth of Carnival to an abrupt halt. Its revenue fell 73% in fiscal 2020 and fell 66% in fiscal 2021. It also became unprofitable in both years and took on more debt to stay solvent.

That rising leverage made Carnival a risky stock to own as interest rates rose, and its stock fell to a 30-year low of $6.38 per share on October 10, 2022. It was more more than doubled to around $15 since that fateful day, but remains nearly 80% below its all-time high. Carnival’s exposure to macro headwinds and high leverage still make it a tough stock to love, but I think it has a viable path to generating a 10-bag return over the next 20 years.

Carnival’s core business is recovering

The pandemic severely disrupted Carnival’s growth in fiscal 2020 and fiscal 2021. But in fiscal 2022 and fiscal 2023, its revenue grew again, it gained more customers, and its occupancy rate reached 100% again. Its revenue of $21.6 billion in fiscal 2023 eventually surpassed pre-pandemic revenue of $20.8 billion in fiscal 2019.

Data source: Carnival.

In the first half of fiscal 2024, its revenue rose 20% year-over-year to $11.2 billion, passengers carried increased 11% to 6.3 million, and load factor increased to 103% . Analysts expect its revenue to rise 15% to $24.8 billion for the full year.

Carnival remained unprofitable on a generally accepted accounting principles (GAAP) basis in fiscal years 2022 and 2023, but narrowed its losses in both years. In fiscal 2024, analysts expect it to finally generate a GAAP profit of $1.5 billion, while Carnival expects its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to grow by 40% to $5.8 billion.

Carnival shares are trading low

From fiscal 2023 to fiscal 2026, analysts expect Carnival’s revenue and adjusted EBITDA to grow at CAGRs of 7% and 17%, respectively. With an enterprise value of $46.6 billion, Carnival shares look very cheap at just twice this year’s sales and 8 times adjusted EBITDA. However, its ratings are compressed by three headwinds.

First, Carnival investors are worried about all the debt they’ve accumulated during the pandemic. It still had long-term debt of $27.2 billion at the end of the second quarter of fiscal 2024, giving it a high debt-to-equity ratio of 4.0, and spent $921 million of dollars in interest payments on that debt in the first half of the year. of the year.

Second, the escalating conflict in the Middle East is driving up oil prices. Those higher fuel costs could squeeze its margins and make breaking even more difficult. Finally, recession fears are dampening market appetite for travel and leisure stocks.

How could Carnival stock deliver a 10 bag gain?

Carnival’s debt is a concern, but it has already prepaid $6.6 billion of its long-term debt in fiscal 2023 and the first half of fiscal 2024. It also simplified its debt structure earlier this year to reduce net interest expense by $55 million in fiscal year 2024 and $85 million on an annual basis. About $2.2 billion of long-term debt matures in the next 12 months, but adjusted free cash flow (FCF) of $2.7 billion in the first half of fiscal 2024 indicates it can cover those payments.

Lower interest rates could also make it easier for Carnival to further restructure its debt at more favorable rates. In terms of the Middle East, oil prices and a potential recession, the company has endured plenty of similar headwinds since its 1987 IPO and I’m confident it will continue to do so.

If Carnival grows its adjusted EBITDA at a modest 10% CAGR from fiscal 2024 to fiscal 2034, that number would reach $15 billion by the final year. Assuming it trades at 15 times adjusted EBITDA by then, its enterprise value would reach $225 billion — a gain of nearly five bags over the next 10 years. If it maintains this momentum by expanding its fleet and winning new customers, it may just be on its way to delivering a 10-bag profit over the next 20 years.