We came across a bullish thesis on Carnival Corporation & plc (NYSE:CCL) on Substack by Alpha Ark Team. In this article, we will summarize the bulls’ thesis on CCL. Carnival Corporation & plc (NYSE:CCL)’s share was trading at $25.66 as of Dec 26th. CCL’s trailing and forward P/E were 17.82 and 14.68 respectively according to Yahoo Finance.
A luxury cruise ship in motion in the ocean, with passengers enjoying the view on the deck.
Carnival Corporation, the world’s largest leisure travel company, operates 95 ships with a total passenger capacity of approximately 270,000, holding a 37% market share. Its portfolio includes nine distinct brands, such as Carnival Cruise Line, Princess Cruises, and Seabourn, catering to various market segments from affordable to ultra-luxury. The COVID-19 pandemic severely impacted Carnival, causing operations to halt and resulting in $25.8 billion in losses from 2020 to 2023. To sustain itself during this period, Carnival incurred significant debt, with its total rising from $11.5 billion in 2019 to $35.9 billion in 2022. However, with the industry’s recovery, Carnival has begun paying down its debt, aided by strong operating cash flow and consistent outperformance of guidance throughout 2023.
By the end of 2023, the company’s Net Debt/EBITDA ratio was ~6.8x, but improvements in profitability are expected to bring this down to ~4.3x by year-end, with further reductions below 3.0x by 2027. Recent credit rating upgrades signal growing confidence in Carnival’s financial recovery. Additionally, the company has implemented strategic measures to enhance profitability, including a shift toward larger, more efficient ships and a pricing strategy focused on higher ticket prices and lower onboard costs. These efforts, combined with reduced capital expenditures and an improving balance sheet, position Carnival to generate significant free cash flow in the years ahead.
The cruise market’s disrupted ship order pipeline has created a favorable supply-demand dynamic, with limited supply growth expected to constrain capacity while demand continues to exceed pre-COVID levels. Based on current ship orders, demand is projected to outpace supply by 2026, driving higher pricing power. In 2024, Carnival’s earnings per share (EPS) are forecasted to rebound to $1.24 from -$0.06 in the previous year, accompanied by $1.3 billion in free cash flow. Utilization rates have already surpassed 100%, reflecting strong demand, with average ticket prices climbing from $833 in 2021 to an estimated $1,227 in 2024.
Despite these positive trends, Carnival’s stock remains undervalued, trading at an EV/EBITDA multiple of 9.5x, compared to a peer average of 13.6x. This presents significant upside potential, with conservative estimates suggesting a 105% increase in stock price based on a forward EV/EBITDA of 8.7x for 2025. A base case Discounted Cash Flow (DCF) valuation further supports this thesis, indicating a potential upside of ~109%, even with conservative assumptions about post-2027 capacity growth and price expansion.
Carnival’s turnaround story is underscored by improving KPIs, growing demand, and favorable industry dynamics. Its combination of higher profitability, reduced leverage, and an undervalued stock price offers a compelling investment opportunity. The company’s efforts to rebuild financial strength and capitalize on market conditions position it well for long-term success, with substantial potential for shareholder returns as it continues to recover and grow.
Carnival Corporation & plc (NYSE:CCL) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 54 hedge fund portfolios held CCL at the end of the third quarter which was 53 in the previous quarter. While we acknowledge the risk and potential of CCL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CCL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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