Carnival's Second Quarter: Is the Stock Still Complicated?

Key Points

• Carnival posted record adjusted net income, EBITDA, and customer deposits in its fiscal second quarter, with revenue rising 5.3% year-over-year to $6.66 billion.
• Shares fell roughly 5% after earnings as cautious forward guidance, Middle East tensions, and elevated fuel costs raised concerns about future net yields.
• Twenty-six analysts covering Carnival hold a consensus Moderate Buy rating with a 12-month average price target of $35.13, representing more than 20% upside.

Carnival NYSE: CCL just reported its second fiscal quarter, and it’s clear from the numbers that the company is sailing in the right direction. But warning signs of rough waters ahead spooked investors.

Based on the latest figures, Carnival continues to execute one of the stronger post-pandemic recoveries in travel. For the three months ended May 31, Carnival posted record levels of revenue, adjusted net income, net yields, and customer deposits. Even with geopolitical tensions and significantly higher fuel costs, the company’s net income rose more than 20%.

But the company’s forward guidance did little to calm nerves, and that overshadowed an otherwise positive quarterly performance. The stock slid sharply after earnings were announced and closed the day down roughly 5%.

Most analysts still like the stock, but investors should recognize that with real strengths come risks.

Strong Quarterly Results Beat Expectations

Carnival’s second-quarter results were convincing. Net income came in at $537 million, 5% lower than a year earlier, though adjusted net income, which strips out one-time items, reached $569 million, up more than 21% year-over-year. Overall, revenue of $6.66 billion represented a 5.3% increase over the same period a year ago.

Adjusted EBITDA for the quarter was a record $1.58 billion, up from $1.5 billion a year earlier. Diluted earnings per share (EPS) were 39 cents, and adjusted EPS rose more than 15% to 41 cents, up from 35 cents in the prior-year period and above analysts’ expectations.

The company also said it repurchased more than $450 million of company stock and, with a dividend yield of 2%, distributed $207 million in dividends in the latest quarter.

Healthy Margins Despite Higher Fuel Costs

While the headline figures were impressive, the unit economics were also encouraging. Net yields in constant currency rose 2.2% for the quarter. Continued price discipline showed up as well, as adjusted daily cruise costs per bed, excluding fuel, held essentially flat year-over-year.

Predictably, fuel was the most visible cost challenge during the quarter. Carnival noted that the increase in earnings per share came despite fuel prices and currency movements, which lowered per share earnings by 6 cents, equal to an overall hit of $73 million for the quarter.

Given 30% higher fuel costs, gross margin yields were down 3.9%. But with adjusted earnings still hitting records, the operating model appears to be holding.

An additional bright spot was a 5.6% improvement in fuel consumption per available lower berth day, suggesting that operational efficiency was at least partially offsetting price pressures.

Debt Reduction Continues to Strengthen the Balance Sheet

The latest numbers also showed Carnival’s recovery continuing after more than three years in the making. When the global cruise industry shut down during the pandemic, Carnival took on enormous debt to survive, suspended its dividend, and watched its stock collapse from the low $50s to nearly $7 in the space of a few months.

Its recovery has been methodical and convincing. As of May 31, long-term debt had dropped to $23.4 billion, continuing a steady decline from $32 billion near the end of 2022. The company’s net interest expense improved in the latest quarter to $285 million from $341 million a year earlier.

Strong Demand Faces External Risks

The rest of the year looks strong for the company, though concerns remain.

On the plus side, customer deposits, or the amount consumers have paid to book a cruise months in advance, hit a record $9 billion by the end of the quarter, up more than $450 million compared with the prior year record. In all, Carnival has booked 93% of its capacity and expects record net yields for the rest of the year, the company’s CEO said.

That positive outlook, however, is paired with cautionary forward concerns. The ongoing tensions in the Middle East have significantly cut into Carnival’s operations in the Mediterranean Sea, and concerns linger about demand and net yields going forward.

While earnings for the second quarter came in above analysts’ expectations, revenue missed fractionally from what analysts projected. Further instability in high-tourist areas could continue to cut into passenger bookings.

Further, energy costs remain a significant variable that can shift results quickly. And weather disruptions, macroeconomic slowdowns, or a shift in consumer spending priorities could each push a slowdown that’s not easy to offset. The consumer discretionary sector is always subject to volatility, and competitors, such as Royal Caribbean NYSE: RCL and Norwegian Cruise Line NYSE: NCLH, are stepping up their offerings.

Wall Street Remains Optimistic

Overall, though, Wall Street analysts like what they see. Of the 26 analysts covering the stock, the consensus rating is a Moderate Buy with a 12-month average target price of $35.13 per share, up more than 20% from current levels.

Finally recovering from its collapse five years ago, shares are up roughly 12% over the past three months. That upside got even more attractive after the pullback that occurred after Carnival reported second-quarter earnings—a reaction similar to what occurred after its first-quarter report.

In all, 21 analysts recommend Buy, while five have the stock as a Hold. The highest price target is $45, while the lowest is $28.70 per share.

Carnival Appeals Most to Aggressive Investors

For investors, the choices seem clear. Carnival Corporation has just delivered its best-ever quarter by several key measures, and the record customer deposit balance suggests demand is not fading.

Aggressive investors who are willing to accept cyclicality and balance-sheet risk could likely find the stock interesting. For those who believe in the durability of consumer travel demand, Carnival offers a combination of strong fundamentals, forward momentum, and a meaningful upside.

Conservative investors seeking above a 2% dividend yield, more predictable results, and greater balance-sheet strength might prefer other options.