To The Moon

$Carnival(CCL)$

Carnival Corp. Inc. (ticker symbol: CCL) is currently trading at $25.70 per share. Over the last six months, this stock has experienced a significant surge. Just recently, we reviewed it at around $19 per share, and it’s up 35% since then, reaching the $25 level. Looking at the five-year chart, we can see that the stock took a hit in 2020, following a certain incident that’s avoided from discussion on YouTube, which saw its value drop to $8 per share. Even in 2022-2023, the stock hit lows around $6 before bouncing back to $25. The question now is whether it can reach those previous highs of $40-$45 per share. We’ll explore this by diving into my automated stock valuation spreadsheet, evaluating the stock using discounted free cash flow (DCF), the comparable company model, and the Benjamin Graham formula for intrinsic value.

Let’s get into it. By entering the ticker symbol CCL, we get the latest company financial data to analyze. Carnival is currently trading at $25.73 per share, with a market cap of $33 billion. Its P/E ratio stands at 17.9, significantly lower than the market average of about 30, which is a positive indicator. The earnings per share are $1.44, and its beta is 2.65, which indicates that the stock is more volatile than the market. The target price is around $30 per share, so is it a good buy right now?

Carnival did used to pay a dividend, but it was paused in 2020, as seen in the dividend data. Regarding revenue, the company was hit hard in 2020 and 2021, but it has since returned to pre-pandemic levels, showing a positive trend. Looking at the most recent quarterly results, passenger ticket and onboard revenue were in the range of $3.4 billion to $6 billion for the past quarter, and for the 12 months, they were between $21.5 billion and $25 billion. This indicates that revenues are on the rise and are back to levels seen between 2015 and 2019, before the pandemic hit.

Net income tells a similar story: the company has returned to profitability, posting $1.92 billion in net income. Looking at the chart, the net income was negative at $48 million just a quarter ago, but now it's in the green, showing a significant turnaround. This aligns with previous years, like 2015 and 2016 when the stock was performing well at around $45 per share.

When it comes to free cash flow, Carnival is generating it, reporting $1.3 billion for the first half of the year. The company’s free cash flow was significantly down in 2020 and 2021 but has bounced back in recent periods. For the most recent quarter, free cash flow was up to $366 million, and for the 12 months ended, it ranged from $1.2 billion to $3.6 billion.

As for share buybacks, the company had historically bought back shares, but following the downturn in 2020, it started issuing more shares to raise capital. Now, let’s move on to the discounted free cash flow model to value the stock based on its future free cash flows. However, based on the model, the current value is showing as $7,000 per share, which is clearly incorrect. We will need to take a closer look at the numbers to determine the proper valuation.

In terms of revenue growth, we are expecting about 5% growth, with projections for $26 billion to $27 billion. However, we're slightly more conservative and will adjust that down to a flat 4%, resulting in a target of $66,000 per share. The reason for this adjustment is that net income margins are currently negative at around -105%, due to the low profitability during the pandemic years. But if we use the more recent average of 8.77% from the last two years, the margins improve. Let’s finish off the analysis.

Looking at free cash flow, the rate is quite high. Initially, we used a 52% free cash flow margin, which led to a value of $16 per share. With a 67% margin, the stock value rises to about $20 per share. We’ll take the more reasonable averages to estimate a fair value.

Looking at analysts’ expectations, they anticipate about 18% revenue growth for the next year, which is higher than the S&P 500. This suggests the current growth forecast might be too conservative, so we’ll adjust it upward to a 5% increase. We’re confident about the margins, and this figure likely represents a historically strong growth period, similar to 2021 and 2022. If margins can increase to about 80%, the stock might be fairly valued.

For the discounted free cash flow model, this suggests the stock is slightly undervalued and could be considered a buy. Moving on, let’s use the Benjamin Graham formula to determine the intrinsic value. This method, developed by the legendary value investor, looks at a company’s P/E ratio, bond yields, and expected growth. Analyst estimates are expecting around 17.7% growth, so based on this, the stock is also considered a buy.

Next, we will evaluate the comparable company model, which looks at competitors in the same industry to determine relative value. We’ll compare Carnival with Norwegian Cruise Line (NCLH) and Royal Caribbean (RCL). Key metrics include revenue growth rate, profit margins, price-to-sales ratio, price-to-earnings ratio, and forward P/E.

Carnival is second in terms of enterprise value and revenue growth, and has the second-highest net income and profit margins. Its price-to-sales ratio is below the market average, and its price-to-book ratio is also lower. Looking at price-to-earnings growth (PEG ratio), Carnival and Norwegian are close to one, with Carnival showing a lower price-to-earnings ratio and forward P/E ratio. Based on these metrics, Carnival is undervalued compared to its competitors, and would be considered a buy.

Lastly, let’s take a look at stock performance. Over the past year, cruise stocks have surged: Norwegian up 70%, Carnival up 75%, and Royal Caribbean up 121%. These stocks have had strong rallies, but if we compare from the lows of the pandemic, Royal Caribbean has outperformed Carnival, even though both have recovered. Overall, Carnival is trending in the right direction, and after several years of sideways and downward movement, it appears to be on an upward path.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.