No-moat Carnival CCL announced its first positive earnings report since 2020′s first quarter. By all accounts, third-quarter results indicate that consumers have yet to pull back on travel, with the firm noting the cumulative advance-booked position for 2024 is above the high end of the historical range at higher prices than 2023. Moreover, booking volumes in the period were around 20% above 2019 levels, helped by Europe demand that has finally returned to prepandemic patterns. Along with the $6.3 billion Carnival has in customer deposits, all signals indicate cruising is resonating with consumers. Shares have traded flat since the announcement as we believe strong third-quarter results (as reported net per day 4% over 2019 levels, adjusted EBITDA of $2.2 billion, and adjusted EPS of $0.86) were offset by a fourth-quarter outlook that included EBITDA a bit below consensus expectations (FactSet) at $800 million-$900 million. In total, the full-year outlook for adjusted EBITDA of $4.1 billion-$4.2 billion was in line with the forecast underlying our $22 (GBX 1,740) fair value estimate.
We still view shares as attractive and believe Carnival is undervalued. To start, we’ve yet to have a full year of normal occupancy levels, which should ensue in 2024. Such improvement, along with pricing, should support healthy revenue growth ahead. Additionally, we believe the aggressive reduction of debt levels will reduce interest expense by nearly $900 million between 2023 and 2027, freeing capital up for reinvestment or a return of capital to shareholders (we think Carnival can return to investment grade in 2027). Also, the firm’s success in attracting new cruisers (2.5 million in 2023) provide a line to repeat business, given the industry has historically generated good satisfaction scores. We think fear around inflation, shrinking consumer savings, student loan repayments, and other spending issues have bogged down shares recently, but should prove to be transient factors.
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