Refinancing And New Destinations Will Elevate Guest Experience In 2025

Key Takeaways

• Strong yield growth and refinancing efforts are set to significantly improve revenue, net margins, and reduce debt, enhancing financial stability.
  
• Strategic investments in marketing, exclusive destinations, and portfolio optimization promise sustained demand, pricing strength, and improved market position.
  
• Heightened macroeconomic volatility, rising costs, and limited capacity growth pose risks to revenue growth, while financial vulnerability may impact future earnings.

Catalysts

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

• Carnival Corporation & plc is experiencing a robust increase in yield growth, far surpassing historical growth rates and exceeding unit cost growth, which is expected to deliver approximately $600 million incrementally to the bottom line in 2025, a 30% improvement from 2024. This should positively impact both revenue and net margins.
  
• The company is executing successful refinancing efforts, projected to contribute an additional $100 million to the bottom line in 2025 alone and potentially reduce debt by $5 billion by the end of 2026, which will improve its net margins and earnings due to lower interest expenses.
  
• Carnival is launching new marketing campaigns to enhance brand awareness and consideration, expected to drive sustained demand and pricing strength, thereby boosting long-term revenue.
  
• Investments in exclusive destinations such as the upcoming Celebration Key and RelaxAway, Half Moon Cay, projected to open in the second half of 2026, are anticipated to enhance the overall guest experience and attract more customers, leading to higher future revenue.
  
• Strategic portfolio optimization, including rebranding initiatives and consolidating fleet strength, positions Carnival for efficiency improvements and a stronger market position, which should positively impact its net margins and earnings.

Carnival Corporation & Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carnival Corporation &'s revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $2.53) by about April 2028, up from $2.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the US Hospitality industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 6.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.53%, as per the Simply Wall St company report.

Carnival Corporation & Future Earnings Per Share Growth

Risks

• The company faces heightened macroeconomic and geopolitical volatility, which could affect consumer confidence and spending, impacting revenue and earnings.
  
• Although onboard spending is currently high, any potential weakening in consumer demand could lead to decreased revenue growth if discretionary spending declines.
  
• Costs related to dry dock maintenance and unplanned expenses have increased, potentially affecting net margins if these costs continue to rise unexpectedly.
  
• The company's heavy reliance on refinancing and debt reduction strategies suggests financial vulnerability, which could impact future earnings if interest rates rise or refinancing efforts stall.
  
• As the company has limited capacity growth planned, there is little room to generate additional revenue from new ship capacity, potentially impacting overall revenue growth if demand does not increase as expected.

Valuation

• The analysts have a consensus price target of $28.3 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 $34.0, 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 2028, revenues will be $28.4 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 10.5%.
• Given the current share price of $19.39, the analyst price target of $28.3 is 31.5% 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.