Refinancing And Seabourn Fleet Consolidation Will Strengthen Future Operations

Key Takeaways

• Efforts to refinance and reduce debt could improve earnings and enhance the company's financial leverage and stock valuation.
  
• Strategic operational shifts and a focus on premium offerings are aimed at boosting revenue and net margins through improved customer experiences and streamlined operations.
  
• Heightened macroeconomic volatility and geopolitical risks could impact consumer behavior and operational costs, affecting Carnival Corporation's net income and revenue growth.

Catalysts

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

• Carnival's refinancing efforts, which are expected to bring approximately $100 million to the bottom line this year, could improve net income and enhance earnings growth, contributing to the stock being potentially undervalued.
  
• The projection of achieving a 12% return on invested capital one year early and an EBITDA per ALBD increase of over 50% from two years ago suggests a strong operational performance, which may influence future revenue growth forecasts.
  
• Marketing campaigns and enhanced customer experiences at exclusive destinations like Celebration Key and RelaxAway, Half Moon Cay are expected to drive higher occupancy and pricing, positively impacting revenue projections.
  
• The consolidation and optimization of their Seabourn fleet and closure of the P&O Cruises Australia brand are strategic moves to streamline operations and focus on higher-margin areas, which could lead to an improvement in net margins.
  
• The reduction of debt by approximately $5 billion over 2025 and 2026, facilitated by refinancing and strong cash flow, aims to lower interest expenses and improve leverage metrics, thereby enhancing overall earnings.

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 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.1% today to 11.7% in 3 years time.
• The bearish analysts expect earnings to reach $3.2 billion (and earnings per share of $2.37) by about April 2028, up from $2.1 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 15.7x on those 2028 earnings, up from 11.5x today. This future PE is lower than the current PE for the US Hospitality industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 6.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.73%, as per the Simply Wall St company report.

Carnival Corporation & Future Earnings Per Share Growth

Risks

• The company notes heightened macroeconomic and geopolitical volatility, which could impact consumer sentiment or behavior, posing a risk to maintaining or growing net income.
  
• Commentary points to sensitivity in consumer demand, especially close-in bookings, which could affect revenue if not managed well.
  
• There are concerns about timing and cost associated with unexpected dry docks, which could inflate operational costs and reduce net margins.
  
• The company's strategy involves significant marketing expenditures; if consumer sentiment shifts unexpectedly, the return on these investments could be lower than anticipated, impacting earnings.
  
• Risks are associated with refinancing and debt commitments, such as managing future maturities, which could affect interest expenses and thereby net income if not strategically handled.

Valuation

• The assumed bearish price target for Carnival Corporation & is $23.32, which represents one standard deviation below the consensus price target of $28.02. 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 $34.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $27.5 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $17.99, the bearish analyst price target of $23.32 is 22.9% higher.
  
• 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.