Mounting Regulatory Pressures And High Debt Will Hurt Profitability

Key Takeaways

• Escalating regulatory pressures, demographic changes, and alternative vacation trends threaten demand, pricing power, and future revenue growth.
  
• High debt, aging fleet, and modernization burdens squeeze margins, constrain reinvestment, and limit financial flexibility.
  
• Strong operational momentum, modernized fleet investments, destination expansion, improving financial health, and a new loyalty program together position the company for continued growth and enhanced profitability.

Catalysts

A cruise company, provides leisure travel services in North America, Australia, Europe, and internationally.

• The company faces escalating climate change regulation that could require expensive retrofitting of ships and higher carbon pricing. This is likely to increase operating costs and capital expenditures over many years, pressuring net margins and reducing free cash flow available for debt reduction or shareholder returns.
  
• Demographic shifts and evolving travel preferences are expected to erode the long-term demand for traditional mass-market cruising, as younger generations increasingly seek eco-friendly, authentic, and adventure-based vacations. This threatens revenue growth and could limit Carnival's ability to sustain premium pricing or high occupancy in the future.
  
• Persistent high debt levels from the pandemic era remain a structural overhang, keeping interest expense elevated and limiting financial flexibility. Even as EBITDA grows, the company is forced to channel cash flow into deleveraging, constraining the ability to reinvest in fleet or return capital to shareholders, and weighing on future net income.
  
• The aging fleet and the need for significant ongoing capex to modernize older vessels and stay compliant with new standards will drive up depreciation and drain resources, further pressuring long-term margins. Modernization cycles will divert capital from growth opportunities and could result in lower returns on invested capital in the coming years.
  
• Increased competition from alternative vacation options such as boutique cruise lines, all-inclusive resorts, and experiential travel providers is expected to intensify price competition and threaten Carnival's pricing power. Sustained industry cost inflation due to supply chain issues and global labor shortages will further compress margins and diminish earnings growth.

Carnival Corporation & Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Carnival Corporation & compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Carnival Corporation &'s revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.7% today to 12.8% in 3 years time.
• The bearish analysts expect earnings to reach $3.6 billion (and earnings per share of $2.39) by about September 2028, up from $2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 16.3x today. This future PE is lower than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.42%, as per the Simply Wall St company report.

Carnival Corporation & Future Earnings Per Share Growth

Risks

• Ongoing record-setting performance, with eight consecutive quarters of all-time high revenues and yields, as well as the highest EBITDA margins in nearly twenty years, suggest strong operating momentum that may continue to lift revenues, net income, and margins over the long term.
  
• Carnival's investments in modernizing its fleet, introducing fuel-efficient ships, and upgrading existing vessels are driving higher passenger demand and spending, which should support ongoing ticket and onboard revenue growth and may improve net margins via operational efficiencies.
  
• Expansion into high-value private destinations like Celebration Key, RelaxAway, and Isla Tropicale, together with advanced marketing and product innovation, positions Carnival to further differentiate its offerings and potentially increase occupancy, pricing power, and onboard revenue per passenger.
  
• The company's accelerating deleveraging and refinancing strategy, with sizable reductions in interest expense and improving net debt-to-EBITDA ratios, indicates strengthening balance sheet health, which can enhance net income as leverage drops and ratings approach investment grade.
  
• Launch of a revamped, spend-based loyalty program is likely to significantly boost customer retention and increase customer lifetime value; even with near-term accounting deferrals, management expects it to become accretive to yields and drive higher long-term value per guest, supporting revenue and margin growth.

Valuation

• The assumed bearish price target for Carnival Corporation & is $24.61, which represents two standard deviations below the consensus price target of $33.09. This valuation is based on what can be assumed as the expectations of Carnival Corporation &'s future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $28.3 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $31.36, the bearish analyst price target of $24.61 is 27.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.