Carnival: Fears Have Likely Peaked, Time To Turn Bullish (NYSE:CCL)

Daniel Wright Carnival Stock Underperformed The Market Carnival Corporation (NYSE:CCL, NYSE:CUK, OTCPK:CUKPF) stock remains well below its pre-COVID 2018 highs, even though there are signs of life since CCL bottomed in late 2022. Notwithstanding improved investor sentiments as dip-buyers returned to support CCL, market pessimism is still palpable as investors reassess Carnival\'s structural recovery. I urged CCL investors to consider taking profit and cutting exposure significantly in my bearish CCL thesis in June 2023. I believe the thesis has been justified, as CCL underperformed the S&P 500 (SPX) (SPY) significantly over the past year. Although CCL stock surged to a July 2023 high close to the $20 level, it proved unsustainable, declining sharply subsequently. Another surge in December 2023 saw the $20 level re-tested but failed again. As a result, buyers didn\'t seem to have the confidence to hold on to their CCL bets, as they cut exposure quickly at CCL\'s $20 critical resistance zone. CCL Quant Grades (Seeking Alpha) Notwithstanding CCL\'s recent volatility, buying momentum has remained robust, as seen in CCL\'s "B-" momentum grade. As a result, I assess that market sentiments over CCL\'s recovery thesis are expected to remain resilient. Carnival\'s Multi-Year Recovery Remains Intact Carnival\'s Q1 earnings release in March 2024 underscored the leading cruise operator\'s bullish assessment. It recorded a 17% YoY surge in net yields, bolstered by improved occupancy and solid pricing levers. As a result, Carnival\'s FY2024 net yields guidance has been raised to 9.5%, highlighting the sustainability of its recovery thesis. In addition,

Carnival has experienced broad-based demand dynamics across its various segments, driven by new guest experiences and repeat guest visits. Coupled with the expected arrival of three new ships to help Carnival meet increased demand, I believe CCL investors who have bought into a multi-year recovery thesis should remain on board. Celebration Key (including a private beach club and other amenities) is expected to be a strategic growth driver for Carnival from 2025, improving its appeal to travelers. Consequently, it has bolstered Carnival\'s confidence in upselling to its customers. Management anticipates growth opportunities through "incremental ticket revenue, onboard spending, and lower fuel consumption." Despite that, management is reticent in providing clarity over its anticipated earnings accretion in 2025. Therefore, I assess that improved visibility over booking trends and potentially higher customer spending could bolster Carnival\'s pricing dynamics. With that in mind, it should underpin Carnival\'s ability to continue deleveraging as it potentially returns to profitable growth moving ahead. The cruise industry\'s "private island" portfolio has grown as cruise companies seek to capitalize on new experiential opportunities. Therefore, I encourage investors to pay close attention to a potential growth infection and improved monetization efficiencies from 2025. Carnival guided to an FY2024 adjusted EBITDA of $5.63B, up more than 30% YoY. However, net yields are expected to normalize to 9.5% even though Carnival guided to net yields of 10.5% for the second quarter. Notwithstanding the anticipated normalization as Carnival laps more challenging comparisons,

returning to profitability should also help Carnival raise funds more efficiently to pay down relatively more expensive debt. Carnival\'s Debt Burden Must Be Monitored Nevertheless, I expect investors to remain cautious over Carnival\'s balance sheet. Its optimal leverage of 3 to 3.5x "is still higher than pre-pandemic levels of approximately 2x." Therefore, its structurally higher leverage ratio could hinder Carnival\'s capacity to engage in more aggressive new builds to capture demand growth rapidly. In addition, Carnival\'s estimated FY2026 adjusted EBITDA leverage ratio of 3.6x would still be much higher than its FY2018 and FY2019 metrics of between 1.75x and 2x. As a result, Carnival\'s quest to drive growth higher could be hindered by its structurally higher-debt financial profile. Accordingly, Carnival is expected to report an adjusted EPS of $1.72 by FY2026, well below its FY2018 and FY2019 metrics of $4.26 and $4.40, respectively. Is CCL Stock A Buy, Sell, Or Hold? CCL price chart (weekly, medium-term) (TradingView) CCL\'s price action is constructive, suggesting its uptrend recovery has remained intact. CCL\'s forward adjusted P/E of 15.1x is about 7% below its sector median. Relative to CCL\'s solid "A+" growth grade, bullish CCL investors might consider the current levels relatively attractive. Wall Street analysts are also increasingly constructive about the cruise industry\'s robust bookings growth. The assessed higher value proposition and attractive economics of the cruising experience for consumers compared to its land-based alternatives is constructive. Furthermore, CCL\'s price action corroborates Wall St