Few businesses were as hard hit by the coronavirus outbreak as cruise line operators, and Carnival Corporation (NYSE: CCL) was no exception.
Yet despite the progress the company has made over the last couple of years, its share price has completed a return voyage to March 2022 levels. Fears of a looming recession and the potential impact on leisure travel demand have sunk Carnival’s stock back below $10.
While the current inflationary environment appears to be increasingly wearing on global consumers, the cruise industry has a secret weapon—major pent-up travel demand. This combined with the following five forces should keep the wind at Carnival’s sails regardless of how choppy the economic waters get.
#1 - Easing Pandemic Restrictions
Government guidelines around Covid-19 vaccination and testing as they pertain to cruise lines have eased in the U.S. and Canada. When you run North America’s most popular cruise brand as Carnival does, this is very welcomed news.
In the company’s recent business update, CEO Arnold Donald credited relaxed coronavirus requirements for driving increased demand for cruises. And with so many Americans craving a vacation after months of lockdown conditions, this is helping unleash a potent revenue stream.
In its most recent fiscal quarter, Carnival served over 1.6 million guests worldwide as people became more comfortable with the cruise atmosphere. This number should only go higher as the recovery continues to unfold.
#2 - Road Trips are Expensive
With gasoline prices at historically high levels near $5 a gallon, the notion of taking a cross-country road trip is less appealing these days. So too is the wear and tear at a time when Americans are trying to squeeze more mileage out of their automobiles in the face of escalating new and used car prices.
Fast food stops are also getting more pricey not to mention dine-in restaurant tabs. Theme parks, golf courses, and other entertainment venues are more costly as well. Add it all up and the usual summer road trip isn’t sounding so fun.
In contrast, the all-inclusive nature of a cruise (and elimination of traffic headaches) makes it an increasingly attractive vacation option. To paraphrase Mr. Donald, Carnival’s value-proposition is likely to keep finding favor with consumers over “land-based alternatives”.
So while much of the recent concern around the stock relates to elevated fuel expenses, a shift to cruises for that same reason could at least partially offset the headwind.
#3 - Fleet Operations, Occupancy are Trending Higher
Due to the fluid nature of the pandemic, Carnival appropriately took a cautious approach to bringing its ships back online even with demand clearly on its side. This has proven prudent and should continue to lead to improving cash flow.
At last check, 91% of Carnival’s fleet is up and running. More ships are expected to come back online in the near future. This stat ranks up there with Moses parting the Red Sea in terms of miracles when you consider the entire fleet and its staff were grounded not long ago.
And when combined with the fact that ship occupancy levels are also on the rise, Carnival appears to be smooth sailing. Management’s ongoing focus on increasing occupancy levels bodes well for better financial performances in the quarters ahead.
#4 - Carnival is Recession-Resilient
To say the cruise industry is recession-proof may be a stretch since an economic downturn would undoubtedly cause some consumers to wipe lavish getaways from the budget. However, to call it recession-resilient is reasonable.
That’s because as long as there are people working, there will be a need for vacations. This gives Carnival an underlying current of demand at some level.
Better yet, if and when we enter a recession, it may not be a typical recession. A strong jobs market heading into the anticipated downturn isn’t likely to weaken much if at all. Worker shortages and ample job openings may keep the U.S. labor market healthy for the foreseeable future. This along with rising wages should benefit popular leisure outlets like Carnival.
#5 - The Stock is Cheap
Although a recession and higher fuel and wage costs are legitimate concerns for Carnival, there are several factors that point to a sustainable recovery. And with strong demand as the powerful force atop the list, long-term profitability should trend upward.
This is primarily why Wall Street analysts are projecting a return to positive earnings in fiscal 2023. The consensus forecast for next year’s EPS of $1.05 is a far cry from the $6.59 per share loss posted last year.
It also makes the stock attractive from a valuation standpoint. At a forward P/E ratio of just 8x, investors, like travelers, should be lining up for Carnival.