Carnival Corporation, the largest cruise company in the world, came under pressure at the height of pandemic fears in 2020 as regulators banned cruise ships from sailing. Despite a notable relaxation of COVID-19 rules this year, travel stocks have failed to take off, which has a lot to do with the broad pessimism toward risky assets. Carnival stock is down more than 63% this year, yet again performing worse than the S&P 500 (SPX), which has lost nearly 20% of its value in 2022. Recent booking trends signal 2023 will be one of the best years in recent memory for Carnival, but the company’s progress can be hindered by the looming economic recession. I am neutral on the prospects for Carnival stock.

Carnival’s Outlook is Improving

For the fourth quarter of Fiscal 2022, Carnival reported revenue of $3.84 billion, an improvement of close to 200% compared to the corresponding quarter last year. The company lost $96 million at the EBITDA level, and for the second half of the current fiscal year, Carnival reported an adjusted EBITDA of $207 million. This is an important milestone as this confirms Carnival is finally approaching profitability from a cash-flow perspective.

Even after adjusting for the dilutive effect of future cruise credits offered to customers whose itineraries were affected due to mobility restrictions in 2020, Carnival reported a 0.5% increase in revenue per passenger cruise day in Q4, which is another promising development.

Occupancy in the recent quarter was 19% below 2019 levels, which is an indication that Carnival still has a long way to go to fully recover from the blow dealt by the pandemic. On the bright side, occupancy in Q3 was 29% below comparable levels in 2019, which highlights that Carnival’s occupancy rates are improving with every quarter.

To assess the short-term outlook for a cruise operator, investors can evaluate the level of customer deposits as these deposits are placed when booking a vacation. Carnival’s total customer deposits eclipsed $5.1 billion in the fourth quarter, marking a record high for Q4. Cumulative advanced bookings for 2023 are above 2019 levels at higher prices, which is a confirmation that demand for cruises is coming back strongly.

Even in a recessionary scenario, Carnival is unlikely to see an erosion in demand as cruises are usually booked by affluent individuals who are little affected by short-term economic downturns. This characteristic makes Carnival an attractive bet in the travel sector during times of economic downturns that are not stemming from a health crisis.

From a macroeconomic perspective, the outlook for the leisure industry continues to improve despite challenges resulting from slower-than-expected economic growth. According to a YouGov survey of 26,000 people across 25 countries, 63% of consumers are planning to travel in 2023 as pandemic-related travel restrictions are being relaxed in popular destinations.

The United States, Europe, and a few nations in the Middle East, such as the UAE, have been recognized as top travel destinations for 2023. This is good news for the cruise industry as pent-up demand can be expected to help bookings in the new year as well.

Not Out of the Woods Completely

Despite a notable improvement in bookings, revenue, and occupancy, Carnival still has to overcome the negative impacts resulting from supply-chain problems and higher energy prices. With almost $32 billion in long-term debt, the company is susceptible to interest rate hikes as well. Even a minor disruption of business in 2023 can hurt Carnival’s financial performance because of this massive debt pile, which needs to be monitored carefully.

Investors will also have to keep an eye on the resurgence of COVID-19 in some parts of the world. For example, China is currently experiencing an unexpected surge in new infections after abandoning its zero-COVID policy earlier this month. Although unlikely, according to health experts, another global wave of new infections could be fatal for Carnival.

Is CCL Stock a Buy, According to Analysts?

The cruise sector is attracting a few bulls on Wall Street, with travel spending continuing to rise. A recent cruise market report prepared by Bank of America analyst Andrew Didora highlighted that there are signs of a turnaround in this sector. According to the analyst, cruise companies might surprise the market with better-than-expected earnings in the first half of next year as people continue to spend on leisure activities despite inflationary pressures. Nonetheless, CCL stock has a Hold consensus rating.

The average Carnival price target is $11.54 based on the ratings of 12 Wall Street analysts, which implies upside potential of 47.6% from the current market price.

Takeaway: Carnival Investors Should Tread Cautiously

Investing in Carnival stock today is a double-edged sword, as things could go in either direction. The company is moving in the right direction, but certain macroeconomic developments that are out of the company’s control could make life difficult in the coming year. For now, investing in Carnival seems suitable only for risk-seeking investors looking for outsized returns.

Source: TipRanks