Dismal Third Quarter Sinks Carnival Shares; Investors Must Wait Until 2023 for Profit Improvement

No-moat Carnival reported worse-than-expected fiscal third-quarter results, delivering adjusted EBITDA of just $300 million, well below the more than $1 billion we had forecast. Although 95% of the fleet was deployed and occupancy was 84%, Carnival remained plagued by higher costs related to COVID-19 protocols and near-term pricing pressures as it continues to book a higher proportion of close-in itineraries and digest future cruise credits. Moreover, the firm’s fourth-quarter outlook for around breakeven EBITDA is significantly lower than the $570 million we had forecast. We believe the slower trajectory to restored profitability is the primary culprit behind the shares tumbling nearly 20% on the day of the release. However, we think concerns about a return to consistent profitability should alleviate in 2023, given that cumulative advance bookings and pricing (normalized for FCCs) are already above 2019 levels. This should permit our 2023 EBITDA outlook to approach 2019 (prepandemic) levels again.