Could strong bookings propel carnival stocks for years to come?

One of the industries most affected by the COVID-19 pandemic has been the cruise industry, as cruise ship operators have generally suspended operations. However, with pandemic-era gridlock long in the rearview mirror, passengers are back.

One company that benefits from this trend is Carnival Corp. (CCL 3.92%) (CUK 4.47%). However, the stock is still well below where it was trading before the pandemic.

Carnival recently reported results for its fiscal third quarter (ended August 31). Let’s take a closer look to see if the company can continue its comeback.

Record the results

Carnival posted strong results for Q3, setting a number of revenue and profitability records. Just as importantly, demand remains strong, with the company recording impressive advanced bookings for both 2025 and 2026.

For the quarter, the cruise operator’s revenue hit a quarterly high of $7.9 billion, up 15 percent. Ticket revenue rose 15% to $5.2 billion, while on-board revenue was also up 15%.

Available lower berth days (or ALBD), which is a measure of capacity based on cabins holding two passengers, rose 6% to 25.3 million. Occupancy, meanwhile, rose from 109% to 112%. Occupancy is based on two passengers per cabin and thus may exceed 100%. These figures show that the company increased capacity and subsequently filled that capacity.

Net returns, which measure revenue minus variable costs (such as commissions, shipping, etc.) per ALBD, rose 9% to $233.87. Gross margin growth on ALBD was even higher, rising 19% to $116.77 as variable costs fell. Both figures show that not only is the company growing revenue based on its increased capacity, but it is also seeing better margins and profitability.

These figures helped the company produce record operating income and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the quarter. Operating income rose 34% to $2.2 billion, while adjusted EBITDA rose 25% to $2.8 billion. Adjusted earnings per share (EPS) rose 48% to $1.27.

Carnival expects fiscal Q4 adjusted EPS to grow 20% to $1.14 billion and adjusted EPS of $0.05. Capacity is expected to be 3% higher than last year at 24 million ALBDs. New yields are expected to rise 7%.

Image source: Getty Images.

For 2025, the company said almost half of its capacity is booked, which is significantly more than last year. This leads to record ticket prices. Meanwhile, he said 2026 bookings are off to an unprecedented start.

While things seem to be going very well for Carnival, the biggest reason the stock is trading at half its pre-pandemic price is the debt needed to get through that period. The company ended last quarter with net debt of $27.3 billion. By comparison, it had $11 billion in debt at the end of November 2019.

Carnival has generated about $5 billion in operating cash flow so far this year, but only $1 billion is free cash flow. She said her first, second and third capital allocation priorities are to continue to reduce debt. Its leverage (net debt/adjusted EBITDA) has fallen to 4.5x and it aims to become investment grade by the end of 2026.

The company has three vessel deliveries spread over the next four years. It also has two notes with high fixed interest rates (more than 10%) that become callable in the middle of next year. Their refinancing should help reduce interest expenses and improve cash flow.

Is Carnival a purchase?

Carnival has done a great job with its business as cruise demand has increased. The key for the stock going forward, however, is to continue to reduce its now high debt load. Its 4.5x leverage isn’t outrageous, but the large amount of debt and the cyclicality of the cruise industry are issues to watch. If the industry takes a turn for the worse due to the economy, then the EBITDA side of the equation could quickly become smaller.

Now, other areas of travel have begun to experience slowdowns, including airlines, hotels and theme parks. The cruise industry lags behind, with trends due to bookings often more distant. At the moment, however, there appears to be clear sailing ahead, and the slowdown in other voyages does not appear to be affecting cruise ship bookings.

That said, given Carnival’s debt load and weakness in other areas of travel, I’d rather err on the side of caution and stay on the sidelines.