Carnival Cruise Lines: Buy, Sell or Keep?

The pandemic has certainly elevated many Internet and technology-focused companies to new heights. But not all companies were so lucky. In fact, some were devastated. Unsurprisingly, Carnival (CCL -0.24%) was one of them. Its operations were forced to shut down for months, and the company’s revenue took a big hit.

But Carnival’s business has recovered nicely from the worst days of the health crisis. Consumers have satisfied their previously pent-up desires for travel, and the cruise giant has been a big beneficiary. So should investors buy, sell or own this cruise line stock now?

Case to buy and keep

In fiscal 2023, Carnival’s revenue rose 77 percent to $21.6 billion, a new record high. And in the first two quarters of this fiscal year, sales were up 20 percent.

“We closed another quarter delivering records, this time in revenue, operating income, customer deposits and booking levels, exceeding our guidance on every measure,” CEO Josh Weinstein said in the release. Q2 earnings press.

Customer deposits are $8.3 billion, a clear indication of consumer interest in cruise travel. Additionally, the company’s operating income was nearly five times higher in Q2 than in the year-ago period.

Another reason why investors may want to buy and hold this stock is because of a key strength that Carnival has — the barriers to entry that are present in its industry.

Imagine trying to start a new cruise line. It would require massive amounts of capital as well as a long lead time to build new ships and prepare them for service. A possible entry would also have to overcome regulatory hurdles that would need to be addressed given that cruises take place in international waters. Health and safety are always issues to worry about. These obstacles protect Carnival’s competitive position.

Case for sale of carnival stock

Despite some positive trends for the company, investors will find no shortage of reasons to avoid the stock. Carnival’s financial position is a top factor. He took on a lot of debt to keep his operation afloat when he had virtually no income during the pandemic. To be fair, the company is slowly paying down that debt. But it’s still disturbing.

As of May 31 (the end of its fiscal second quarter), the business had more than $29 billion in long-term debt. That was 41% more than its current market cap of $21.8 billion. The fact that the $921 million in interest expense Carnival paid in Q2 equaled 110% of its operating income won’t do much to reassure investors. And don’t forget, the company is seeing record demand for its travel deals.

A valid argument can be made that Carnival operations are cyclical. He fears a recession can strike are still prevalent. If consumers pull back significantly on discretionary spending, particularly on travel and leisure, Carnival’s progress could quickly fade and it could struggle to overcome its large debt load.

One of the biggest expenses of the Carnival is fuel. The company’s problem, however, is that changes in the price of this key input are beyond its control. Airlines face a similar conundrum when it comes to managing unpredictable fuel costs.

A final reason to sell Carnival stock is its poor track record as a long-term investment. Over the past 10- and 20-year periods, stocks have lost 56% and 64%, respectively. The company is still trying to recoup its losses from the pandemic and return to its peak share price, which I’m not sure will happen anytime soon, if ever.

While Carnival’s momentum is impressive and its market has considerable barriers to entry, it’s hard for me to be optimistic about the stock’s long-term outlook.