Where will the carnival stock be in 1 year?

If you thought Carnival (CCL 2.30%) (CUK 2.21%) stock return finished, think again; it has only just begun. Although shares are up 90% from 2020 lows, the company is still 77% from its pre-pandemic highs.

And those heights were not high, unreasonably high. They reflected an industry leader with market performance, tons of opportunity and a competitive dividend.

Now that Carnival is past its decline and showing robust performances, why can’t it get back up there? Let’s see what’s happening at Carnival and where it could be in a year.

Sales: Growing

Sales are already at record levels, but they continue to grow. The demand for a comeback has been incredible, and while there were concerns that it would eventually calm down, it hasn’t happened yet. Revenue for the fiscal second quarter (ended May 31) was $5.8 billion, the best ever.

People want to cruise, and the momentum is so great that Carnival’s position for the rest of the year is at its best ever for both occupancy and price. The company is already booked until 2025 at high fares and high prices. Management has rebranded part of its fleet to meet higher demand and work more efficiently.

Demand is likely to slow next year at this time, and there could be some congestion as it stabilizes at pre-pandemic levels. But Carnival could also benefit from slowing inflation and lower interest rates, which are expected to be cut later this month and lead to even higher demand.

Profits: Improvement

Carnival was a very profitable company before the pandemic, but it is still turning around. It has achieved positive quarterly net income on a generally accepted accounting principles (GAAP) basis twice now in the past year, including in the second quarter at $92 million, up $500 million from last year.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $1.2 billion in the second quarter, up from $681 million last year. Management recommends adjusted EBITDA to grow 40% for the full year.

Even Carnival’s net losses have been close to zero, and the company is inching closer to reliable profitability. At this time next year, Carnival could be completely out of the woods and making annual profits. Analysts expect $1.19 in earnings per share (EPS) in 2024 and $1.55 in 2025.

Debt: Declining

The big problem with Carnival right now is its massive debt. It has always maintained some debt as part of its operating model; this is not uncommon with established, dividend-paying industry leaders. But the cruise line has taken a huge amount to stay solvent, and that relies on cash availability, adding risk.

While no new pandemic or other global phenomenon is expected to wipe out Carnival again anytime soon, the company is susceptible to any issues or changing trends. That’s why investors are so worried about the possibility of a slowdown in demand. If revenue growth doesn’t keep pace, Carnival’s debt payments could be in jeopardy.

So far, so good. He paid off the debt as quickly as he could while securing operations and cash reserves. The company ended the quarter with $4.6 billion in cash after paying down another $1.6 billion and shuffling some of its debt to optimize its position. It uses cash from operations, which was $2 billion in the second quarter, and adjusted free cash flow of $1.3 billion.

Over the next year, look for updates on how they’re handling debt repayment and liquidity. The company should continue to pay through healthy operations and free cash flow.

Rating: Bargain

Carnival shares are trading at bargain levels due to debt levels. It has a price-to-sales ratio of 0.9 and a one-year forward price-to-earnings (P/E) ratio of just 10.

As Carnival generates higher profits and reduces its debt, it won’t stay this cheap forever. If you have some appetite for risk, Carnival stock should be higher next year and reward you in the long run.