Carnival Offers Q3 Update; Shares Modestly Undervalued

No-moat Carnival CCL printed preliminary third-quarter results that included a $1.7 billion adjusted net loss, in line with the $1.76 billion loss we had forecast. With the entire fleet offline in the period, there is little anticipated by way of revenue, a factor we expect to improve incrementally in the fourth quarter, with two Costa ships set for sailings by Sept. 19 and Aida teed up for deployment in the autumn. This pause in operation has given Carnival the opportunity to prune its fleet, and the firm now expects 18 ships to exit the fleet (12% of capacity) over the near term. These 18 ships accounted for just 3% of operating income in 2019, leaving Carnival with a fleet that could generate a richer EBITDA margin mix once sailings resume in earnest. Given limited financial detail and our forecast proximity to net income, we don’t plan to alter our $20 (GBX 1,660) fair value estimate and will re-evaluate the intrinsic value when full financial statements are disclosed at the end of September.

There were some bright points shared, providing hope for the cruise business longer term. First, cumulative advance bookings for the back half of 2021 are at the higher end of the historical range, at a price that is lower than the back half of 2019 by a mid-single-digit rate (implying around $180 average per diems). And second, more than half (55%) of the bookings taken in the quarter were new bookings, rather than rebookings, indicating interest from both previous and new to cruise travelers remains. We had already incorporated a slow recovery to Carnival’s business, with per diems again passing 2019 levels in 2024, the same year the company could generate mid-20% EBITDA margins again (that match 2019 levels). However, much of the upside potential hinges on the lack of a second wave of COVID-19 taking hold and the gradual reintroduction of the fleet over the next 12-15 months.

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