2 Reasons to Buy Carnival Stock Like There's No Tomorrow

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2 days ago

The giant cruise ship operator managed to navigate past the pandemic.
Following a tough period, demand for cruises has surged once again.
Now, Carnival is shifting gears from spending money to paying down debt.
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Carnival (NYSE: CCL) is one of the largest cruise ship operators in the world, and it's producing record results right now. The stock price has remained well below its pre-coronavirus pandemic peak, at least partly thanks to a heavy debt load. But that factor could change over the next few years, which might make some investors interested in buying the stock like there's no tomorrow. Here's why that could be a good idea, and why it might not be.
Carnival operates cruise lines, including some of the best-known cruise brands in the world. The list includes Carnival, Cunard, Costa, Holland America, and Princess, among others. There are really two different businesses in one here, when you look at the big picture.
The first business is selling cruises. That includes a trip on a boat, food, and some entertainment. But there's a second business in selling add-ons to cruise customers. The list of additional items that can be purchased spans a broad spectrum. The shops on the boat sell clothing, jewelry, and other items. There are usually specialty dining restaurants on the ship that cost more. And there are experiences both on the ship and off that can be bought, from bingo to water sports.
This is a very big and complex business, but the all-in cost of a cruise is attractive relative to other vacation options. That's one of the reasons why Carnival's business is doing so well right now. In the second quarter, it reported record revenue, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), and operating income. The company also has an all-time-high customer deposit level, which suggests that the strong results will continue into the future.
That's the first reason to buy Carnival like there's no tomorrow -- its business is performing well, and that strength should continue for the immediate future.
The second reason is that Carnival is shifting from investing in new ships to paying down debt, which largely helped to fund new ships (in addition to helping the company navigate the coronavirus pandemic). Leverage has been a major headwind for Carnival, so strengthening its balance sheet should be seen as a positive among investors. Lower debt could easily lead to a higher valuation.
So there are a couple of compelling reasons to buy Carnival, given that its stock price remains well below its pre-coronavirus pandemic highs. That was the point at which the company's debt levels really took off. But there's an important nuance to this story that might cause some investors to hold off on buying this stock.
Part of the growth Carnival has experienced of late came from the recovery following the business basically being shut down during the pandemic's height. Another part of the growth has resulted from investing in new ships. Those two stories are largely played out at this point. So while Carnival's results are strong, they could start to flatline. While they are likely to remain at a high level, compared to the recent past, a lack of growth will probably turn some investors off.
Then there's the debt, which remains quite high. Paying it down will be a positive, but the rate of debt reduction will be important to monitor. It will probably take a couple of quarters to get a sense for what management is really capable of doing on this front, now that it has shifted more toward fiscal responsibility. Waiting another quarter or two probably won't hurt more conservative investors.
There's no question, Carnival's business is operating at a high level today. It's also working on the important task of debt reduction. Those two facts support buying the stock, perhaps aggressively. However, it's important to keep in mind that paying down debt is coming at a time when growth could hit a plateau. And while debt reduction is good, it isn't the same thing as having a low level of debt. Some investors may want to remain on the sidelines here a little longer.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
2 Reasons to Buy Carnival Stock Like There's No Tomorrow was originally published by The Motley Fool