After warning investors to hold off investing in the cruise lines until the all clear sign, Carnival Corp. (CCL) is now investable. The company finally expects all of their ships to start sailing by May, yet ironically now the market isn’t jumping into the stock. My investment thesis is now fully Bullish on Carnival and the cruise line sector in general.
End Of Covid Restrictions
All around the world, people are starting to fight back against COVID restrictions. Texas just sued the federal government against mask requirements on airlines and Canadian truckers are protesting against vaccine mandates in Canada. Other areas such as Washington, D.C., have dropped mask and vaccine requirements, all setting up a scenario where restrictions blocking cruises are all but over.
The vast majority of the US and European cruising populations are already vaccinated and boosted by now. The CDC released voluntary procedures in a key shift for the health agency to limit control of future COVID-related restrictions holding back the industry.
Carnival agreed to participate in the CDC program probably due to effective removal of mask requirements and vaccinated standards for kids under 5. The cruise line appears to have much more flexibility without mask requirements and the ability to operate all cruise ships.
Even with the cruise lines participating in the new voluntary program from the CDC, the Cruise Lines International Association did fight back on the unnecessary guidelines from the health organization. The trade association released the following statement suggesting the cruise industry won’t accept future decisions of the health organization with over reaching restrictions:
The result has been a dramatic drop in the number of COVID-positive cases, with hospitalizations being extraordinarily rare. The latest CDC guidance appears out of step with the actual public health conditions on cruise ships and unnecessary in light of societal trends away from more restrictive measures.
The hotel industry is already on par for a full recovery and one can argue the lack of vaccine and mask mandates in most hotels should resemble how the cruise line industry operates. The STR report from November already had the hotel demand matching the 2019 levels with RevPar topping 2019 levels by 2023.
Just last week, Marriott International (MAR) reported strong results during the holiday period leading the stock to record levels. If consumers are flocking to hotels for multiple days, one has to argue the cruise lines should fully recover with similar restrictions limited.
With limited COVID restrictions outside of vaccine requirements going forward, the cruise lines can return to normal operations using safety protocols that are no more limiting to hotel operations.
Of course, cruise lines getting back to normal isn’t the same as Carnival generating the same pre-COVID earnings per share. What investors need to focus on is what the cruise line will produce going forward with the higher debt levels and share counts. The highly profitable cruise line should be back to generating similar types of operating income.
A big key to the EPS targets is looking past the next quarter. Once Carnival is fully operating all of their ships by May, the company is immediately very profitable.
The consensus analyst estimate has Carnival not being profitable until FY23 on an annual basis, but the profits start flowing in during FQ3’22 (Aug. quarter). The cruise line is a profit machine through the 4 quarters ending in May 2023 to the tune of a $1.34 per share.
In addition, Carnival is much more profitable now when looking beyond the startup costs to get ships back to seaworthiness. In essence, the cruise line is back on strong footing operationally. The big question now is the profit streams in the future.
Carnival has substantially more net debt at $24.1 billion vs. around $10.0 billion pre-COVID. In addition, the diluted share count is up ~0.4 billion shares to 1.1 billion.
Regardless, the above analyst EPS estimates factor in these higher counts. Carnival has already refinanced debt to remove $400 million in annual interest expenses.
Analyst EPS targets should only rise as the cruise line is able to relaunch voyages and produce the cash flows needed to start repaying debt. Carnival now trades at less than 10x FY24 EPS targets of $2.37, which could easily get pulled forward into FY23 with full operations underway and normalized by the start of the fiscal year.
The key investor takeaway is that now is the time to buy the cruise lines. Carnival is finally in a position to return to normal operations by May and the stock trades down nearly $10 from the 2021 highs. Investors have fled the stock just as the risks of extended restrictions are starting to disappear.