Fleet Investments And Strong Bookings Will Sustain Positive Demand Trajectory

Key Takeaways

• Carnival's strategic investments and focus on efficiency are expected to improve net margins and operational management.
  
• Strong booking volumes and fleet investments indicate continued revenue growth and a positive demand trajectory.
  
• The company's financial performance is sensitive to consumer spending, operational costs, geopolitical events, and competitive pressures, impacting revenue and profitability.

Catalysts

Engages in the provision of leisure travel services in North America, Australia, Europe, Asia, and internationally.

• Strong demand across all major brands has enabled Carnival to increase full-year yield guidance for the third consecutive year, indicating a potential for continued revenue growth driven by high-margin same-ship yield growth.
  
• Carnival's strategic focus on efficiency improvements and cost guidance enhancements suggests a pathway to increased net margins through better operational management.
  
• Record-breaking booking volumes for 2024, 2025, and 2026, with nearly half of 2025 already booked at higher prices, highlight Carnival's ability to generate future revenue growth and sustain a positive demand curve.
  
• Investment in the fleet, including the introduction of new ships and major modernization programs, is expected to contribute to additional revenue uplift, positively impacting both EBITDA and net income.
  
• Carnival's emphasis on de-leveraging and improving its balance sheet, combined with a conservative newbuild order book, positions the company for enhanced financial metrics, including ROIC, and supports a long-term strategy for returning value to shareholders.

Assumptions

• Analysts are assuming Carnival Corporation &'s revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $2.27) by about December 2027, up from $1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2027 earnings, down from 22.1x today. This future PE is lower than the current PE for the US Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.58%, as per the Simply Wall St company report.

Risks

• The company's reliance on consumer discretionary spending implies that any economic downturn or shift in consumer confidence could negatively affect ticket sales and onboard spending, impacting revenue and net income.
  
• Increases in fuel prices or changes in environmental regulations could raise operating costs, adversely affecting net income and EBITDA margins.
  
• Geopolitical tensions or natural disasters, such as hurricanes, may lead to itinerary changes or cancellations, potentially reducing demand and impacting revenue.
  
• Significant investments in fleet expansion and upgrades, as well as new destination developments, pose operational and execution risks that could affect cost guidance and impact net income and EBITDA.
  
• The cruise industry is highly competitive, and any loss of market share to competitors or inability to attract new-to-cruise guests could result in lower occupancy rates or the need for pricing discounts, negatively impacting per diem rates and revenue.

Valuation

• The analysts have a consensus price target of $26.53 for Carnival Corporation & based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $27.6 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 9.6%.
• Given the current share price of $26.61, the analyst's price target of $26.53 is 0.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.