Carnival: Comprehensive Analysis and Valuation of the Leading Cruise Line

Carnival Corporation, the world's largest cruise company, is reaching new revenue highs and aiming for $24 billion in 2024. Under CEO Josh Weinstein, the company focuses on balancing price and occupancy, optimizing debt, and enhancing sustainability. This analysis covers Carnival's recovery, market position, competitive landscape, and a DCF valuation, highlighting its growth potential and strategies.

Theory

• The travel and leisure sector is experiencing rapid growth due to the change in people's behavior after the pandemic, as they now want to travel much more than before. The cruise industry is one of these industries. However, due to the pandemic, they suffered significant losses and incurre in a lot of debt to survive.

• Carnival is the largest cruise company in the world (by revenue) and has very good future prospects with the travel boom. Additionally, due to the pandemic, its stock value decreased and the market may be undervaluing its true worth.

Description of the company

To deliver unforgettable happiness to our guests by providing extraordinary cruise vacations, while honoring the integrity of every ocean we sail, place we visit and life we touch.

• Carnival Corporation & plc, led by CEO Josh Weinstein, is the world's largest cruise company by revenue. It offers a wide range of cruise experiences, from mainstream to ultra-luxury, across North America, Europe, and Australia.

• Operating multiple brands like Carnival Cruise Line, Princess Cruises, Holland America Line, AIDA, Costa Cruises, P&O Cruises, and Seabourn, Carnival provides everything from affordable vacations to exclusive luxury trips.
• The company's goal is to offer comprehensive experiences, including all on-board expenses.

Moats (Competitive Advantages)

Durable Cost Advantage [Strong]

• Carnival has one of the largest cruise fleets in the world. Building these ships is costly and time-consuming.
• New entrants face significant time and investment challenges to compete with Carnival.

Intangibles (Premium Brand) [Weak but Working]

• Brand Recognition: Carnival is a well-known brand associated with cruise vacations.
• Loyal Customer Base: 55% of customers are repeat cruisers.
• Continuously adding new destinations and unique onboard amenities, like Half Moon Cay, Amber Cove, BOLT Sea Coaster, and the 360 Degree Restaurant.

Switching Costs [Weak]

• Reservation Commitment: Difficult to cancel once booked, with reservations made 1-2 years in advance.
• Early Booking Incentives: New fare types and policies encourage early bookings and enhance customer retention.

Fundamentals

• Carnival has shown a remarkable recovery in revenue, reaching levels similar to those of 2019, and is on track to achieve $24,000 million in 2024.
• The operating margin has improved from the steep losses of the pandemic years but still has room for optimization, aiming to return to the historical range of 16%-16.5%.
• Free cash flow (FCF) margin is now positive, indicating healthy cash generation. Despite this, debt remains a concern. The EBIT/Interest Expense ratio improved from -5.5 in 2020 to 1.5 recently. Carnival is working to reduce its interest rate from 7.5% to 5.5% to further enhance financial stability.

• Carnival has shown significant operational recovery and growth. PCDs, measuring passenger days on cruises, surged to 97.2 million in the last twelve months. ALBDs, representing total passenger bed-days available, increased to 93.4 million.
• The occupancy rate reached 104%, indicating high demand, as ALBDs assume two lower berths per cabin, meaning there are more than two passengers per cabin on average. Total cruise guests carried reached 13 million, accounting for over 30% of the global market.

SWOT Analysis

Strengths

• Market Leadership: Carnival is the top 1 or 2 in various global markets, holding at least 30% market share in key regions.

• Advance Revenue: High liquidity with customer deposits reaching an all-time high of $7.2 billion.
• Debt Management: Proactive refinancing to reduce interest rates from 7.5% to 5.5%, expected to save over $50 million annually in interest expenses.
• Historical Booking Records: Allowing for strong pricing power.

Weaknesses

• Interest Coverage: The ratio is at 1.5, indicating limited financial flexibility.
• Stock Dilution: Significant increase in shares over the past five years, diluting shareholder value.
• Ship Deliveries: No new ship deliveries in 2026 and only one in 2025, which could impact future growth and capacity.

Opportunities

• Pricing Power: High advance bookings allow for maintaining elevated prices, with strong positioning in North America and Europe.

Threats

• Competition: Competitive pressures and discounting from other cruise lines.
• Fuel Price Volatility: Fluctuations in fuel prices could adversely affect operating costs.

Strategy in following years

Revenue and Occupancy Management

CEO Josh Weinstein emphasized balancing price and occupancy to maximize yield over time, focusing on generating the highest possible revenue.

SEA Change Targets

• Sustainability: >20% reduction in carbon intensity vs. 2019.
• EBITDA: 50% increase in adjusted EBITDA per ALBD by 2026.
• Adjusted ROIC: 12% adjusted ROIC by 2026.

Financial Goals

• Optimize revenue management and invest in advertising.
• Increase newbuild capacity and leverage private islands for unique experiences.
• Proactively refinance debt to reduce interest rates and improve financial stability.

Sustainability and Carbon Reduction Initiatives

• Enhance energy efficiency and adopt low-carbon technologies.
• Reduce waste and promote recycling.
• Support sustainable tourism and conservation.
• Upgrade fleet with more efficient ships and eco-friendly technologies.
• Invest in LNG, biofuels, and battery systems.
• Carnival now has an ESG score of 71.

Competitors

The main competitors for comparison are Royal Caribbean, Norwegian, and Lindblad. Viking Holdings is excluded due to its recent entry and insufficient data, while MSC Cruises is not publicly traded.

Carnival's principal rival is Royal Caribbean.

• Carnival: Targets fun-seeking, extroverted young travelers with affordable fares, focusing on the Caribbean, Bahamas, and Mexico.
• Royal Caribbean: Caters to families and adventure-seekers with diverse activities and destinations, including Asia, Europe, and Alaska.

• Carnival Corporation: Leads with $23.4B in revenue and a 49.2% market share. Strong FCF margin and significant capital expenditures.
• Royal Caribbean: High revenue growth (CAGR 6.39%) and the highest operating margin (22.9%). Solid ROIC at 8.4%.
• Norwegian: Highest revenue growth (CAGR 12.66%) but negative FCF margins. Aggressive expansion.
• Lindblad: Niche market with $579.8M in revenue and strong growth (CAGR 11.47%), but struggles with profitability.

• In North America, it's more competitive with Carnival at 49.5% and Royal Caribbean at 32.3%. In Europe, Carnival dominates with 57.1%, significantly ahead of competitors.

• In market valuation, Royal Caribbean has the highest Market Cap. Carnival, compared to its peers, has a P/E ratio above the average, but for the other metrics, it is below the average, indicating a potential undervaluation.

Discounted Cash Flow

• Let’s go over the numbers. For the DCF, I have three scenarios. The variables that remain unchanged across these scenarios are: Cost of Equity of 16,5%, Shares oustanding of 1452M (Dilution of shares 3.03% Anually) and Terminal Growth Rate of 2.31%.
• To perform the DCF, I used Finchat to build the model and incorporated some projections from Refinitiv and also the projections of Cruise Lines International Association.

Realistic (Implied Share Price: $24.15)

• Revenue growth aligns with industry forecast ($28,679M in 2028).
• EBIT margin optimization to 16.5% in 2028.
• Cost of debt optimization from 7.5% to 5.5% (WACC of 10,1%).

Pesimistic (Implied Share Price: $14.03)

• Revenue growth below industry forecast ($27,076M in 2028).
• Less EBIT margin optimization (15% in 2028).
• No cost of debt optimization (remains at 7.5%) [WACC of 11,2%].

Optimistic (Implied Share Price: $28.58)

• Revenue growth exceeds industry forecast due to pricing power [10% increase in revenue per guest until 2028] ($31,651M in 2028).
• Faster EBIT margin optimization (16.5% in 2028; 14.5% in 2025).
• Cost of debt optimization from 7.5% to 5.5%.

Average implied share price: $23.51

• With a weight of 60% Realistic, 20% Pessimistic, 20% Optimistic.

Disclaimer

This analysis was conducted for my personal investment decisions and is not intended as financial advice. Please conduct your own research and consult a financial advisor before making any investment decisions. This valuation was derived using projections based on future scenarios that assume specific cash flows, which may not materialize.

Conclusions

• Based on this analysis, the real value of Carnival Corporation's stock is estimated at $23.51 per share.
• This valuation is supported by several factors: strong revenue growth, with a forecast of $28 billion for 2028, and strategic initiatives focused on balancing price and occupancy, optimizing debt from 7.5% to 5.5%, and enhancing sustainability.
• Carnival's robust economic moats, including market leadership, a diverse brand portfolio, and a loyal customer base, provide significant competitive advantages.
• Additionally, the company's operational recovery, demonstrated by significant gains in passenger cruise days and occupancy rates, indicates high demand and efficient capacity use. These factors collectively highlight Carnival's resilience and potential for substantial long-term value.

Bibliography

• State of the Cruise Industry Report 2024 by Cruise Lines International Association.
• Refinitiv.
• Finchat.
• Carnival Corporation Form 10-K and Form 10-Q.
• Q&A sessions and investor day presentations of Carnival Corporation.