The carnival offered a quarter of records. But here’s even better news for shareholders (and it could supercharge the stock).

After the turbulent seas of the first days of the pandemic, Carnival (NYSE: CCL) (NYSE: CUK) sailed in calm waters. The world’s largest cruise operator recently reported a record-breaking quarter, beat analysts’ earnings estimates and raised full-year guidance for the third time.

The recipe for such success? Carnival focused on controlled spending, cost savings in key areas such as fuel, and made efforts to increase guest spending on board.

All of this has helped Carnival, which had to halt sailings in the early stages of the pandemic, get back on track to financial health – and growth. Investors have recognized the company’s progress, which has sent shares up more than 29% over the past year.

Going forward, the stock could see more gains. That’s in part due to Carnival’s fantastic earnings performance, but another element may be even better news for shareholders.

The carnival debt wall

First, let’s take a quick look back in time at the challenges Carnival has faced in recent years. The stoppage of sailings drove the previously profitable company into a loss and led to Carnival building a wall of debt. This has also affected stocks, which are down nearly 60% in 2020.

But Carnival set sail for the recovery through various cost-saving efforts — from limiting new ship orders to designing routes that favor fuel efficiency — and travelers have been rushing back to this popular type of vacation as coronavirus restrictions eased. All of this has put Carnival on the path to superstar results this past quarter.

In the quarter, Carnival reported record operating income of $2.2 billion, record third-quarter revenue of $7.9 billion and an advanced accumulated position reserved for 2025 that surpassed this year – and that’s at higher cruise prices. Revenue and earnings per share also came in ahead of analysts’ estimates for the quarter.

Finally, Carnival raised its full-year adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to $6 billion — that’s up nearly $200 million from guidance dates a few months ago and represents a 40% increase from last year. And the company also expects an adjusted return on invested capital of 10.5%, half a point better than previous guidance.

This is all fantastic news and suggests more growth ahead for Carnival. But another element is even better news for the company and shareholders, as it can help Carnival address its biggest challenge today: debt reduction. And this is the latest move by the Federal Reserve.

The story continues

A big move by the Fed

The Fed recently cut interest rates by 50 basis points — a bigger-than-expected move — and suggests it may cut rates two more times before the end of the year. The initial move is the central bank’s first of its kind in four years and marks a path to lower costs for heavily indebted companies — such as Carnival.

As it stands, Carnival has handled a complicated situation well by focusing on paying down floating rate debt to make itself less vulnerable to interest rate fluctuations. “We will continue to seek more opportunistic refinancings over time,” Chief Financial Officer David Bernstein said on the recent earnings call. This suggests that a lower rate environment could significantly reduce Carnival’s costs over time and help the company achieve its financial health goals.

Carnival has gradually improved its net debt-to-EBITDA leverage, a measure of a company’s debt relative to its cash flow, and considers itself “two-thirds” of the way to investment-grade status – which it aims to to reach it in 2026. (Carnival also has prepaid debt, for example prepaying $7.3 billion in debt starting in 2023.)

So yes, Carnival’s earnings news is great for the company and investors, but the Fed’s recent move — along with the idea that more rate cuts could be on the horizon — could be an even brighter sign. That should give the cruise giant an extra push when it comes to reducing debt, an effort that will lead to smoother sailing for Carnival and its shareholders.

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Adria Cimino has no position in any of the actions mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

The carnival offered a quarter of records. But here’s even better news for shareholders (and it could supercharge the stock). was originally published by The Motley Fool