In this “Quick Analysis” series, I will share my general quick views on different types of companies (you can think of it as a simplified summary). These are just my views and are not meant to be financial advice and you do not have to agree, they are purely for educational purposes only (read our full disclaimer here). If I am vested in the company as of the time of writing, I will also disclose it.

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What Does Carnival Corp Do?

Source: Carnival Cruise Lines

“Carnival” based on the Oxford dictionary can also be defined as “a traveling funfair or circus.”

The name is apt for a company whose job is to ensure that people have fun when using their products and services. By now, I am sure most of you would have already guessed that Carnival Corp is in the Cruise industry. An industry that has been battered by COVID-19 for the past year.

Carnival almost went under and was in a lot of heat in early 2020. That was when they managed to raise an unprecedented amount of debt to keep themselves afloat and even got The Public Investment Fund, Saudi Arabia’s sovereign wealth fund to acquire an 8.2% stake in Carnival Corp back in early 2020.

Carnival is in fact the largest cruise company in the world with a portfolio of brands targeting different demographics and countries. Their brands include Carnival Cruise Lines, Princess Cruises, Seabourn, Cunard Line, Aida, P&O Cruise, and Holland America. In total, they have around 80+ cruise ships to be deployed once cruising can be resumed safely in various countries that Carnival Corp is in. 

As of the end of Q2 2021, they have announced the resumption of operations for 42 of their ships across nine brands by fiscal year end. 

Does Carnival Corp Have A Competitive Advantage?

I think Carnival Corp does have a certain differentiation in the cruise industry, which is economies of scale and branding. With economies of scale, they are able to use the same resources for different brands and save costs. And good branding leads to easier sales because when customers go on cruises, they want to go with a brand that they trust and have had good experiences before. A good example of this is that despite their minimal advertising spend, there has been an acceleration in booking trends globally. 

Unlike business travels, I think cruise will recover faster due to pent-up demand in people wanting to travel, have fun, and experience leisure travel again. Of course, the path ahead will still be very rocky with different countries’ vaccination rates and opening up timelines being different. But I think we are generally moving in the right direction.

The US has started opening up for cruise sailings, mainly for vaccinated customers. July 3 is the rough relaunch date for Carnival Corp. The “Have Fun, Be Safe” protocols will be in place that is based on the CDC guidelines and requirements. That includes requiring COVID-19 vaccinations for all passengers at least 14 days before the cruise date.

Vaccinated customers will also not be required to wear masks, although they still must do so inside cruise terminals and follow guidelines in excursions and ports of calls. Those who have not received the full vaccination will have more restrictions that include wearing masks, more social distancing measures, and testing before and after the trip.

I think Carnival’s positioning in the Cruise industry is very strong. But as a business, I do not think that they have the characteristics of Compounders like Tencent, MercadoLibre, etc. This means that I think Carnival is a good business in the Cruise industry but it is not a great business as it is an asset-heavy and generally low ROIC kind of business.

How Is The Valuation Range For Carnival Corp Like?

Source: own calculation

Using a simple DCF calculation, in my view, Carnival Corp could be worth between $33.84 to $54.76 depending on the assumption one makes. That is a potential upside based on my assumptions of around 18% to 91%.

The bear case assumption is assuming pre-pandemic free cash flow only returning in 2024 and the bull case is assuming even higher free cash flow than pre-pandemic due to pent-up demand by 2023.

Do note that these are based on my assumptions and you should do your own analysis.

Robin Farley from UBS estimates that Carnival Corp is worth $42 per share and rate it a buy. She says that while “the near-term outlook has gotten worse, with continued delays in the restart, the longer-term outlook has improved as vaccines become more widespread.”

In Conclusion

I have been long on Carnival Corp (mainly through long call options) since 2020. While the risk to reward ratio might not be appealing to most, at the time, I found that going long through the calls has a pretty good risk to reward opportunity. And I am still long now.

While Carnival Corp may not give me the biggest gain as compared to say other Tech stocks, it is one that is within my circle of competence and one that I am certain about.

And overall, think that Carnival Cruise stock will likely sail higher in the future, along with more safe sailings in the sea and the returns of profits and free cash flow if their plan goes smoothly. Plus the pent-up demand has already translated to higher pricing in 2021 that is above 2019 levels, according to a JPMorgan research note. this is another sign that Carnival Cruise stock is likely having a short to a medium-term tailwind that will help it sail higher.

Yesterday on 24 June Carnival Corp just had their Q2 earnings call, you can read the transcript here.

Disclaimer:

The information provided is for educational and general information purposes only and is not intended to be personalized investment or financial advice. We make no promises as to the accuracy or usefulness of the information we present.

Important: Please read our full disclaimer.

Disclosure:

I am/we are long CCL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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