There were many businesses, particularly internet-enabled companies, that thrived during the pandemic. There were others, like Carnival(NYSE: CCL), that struggled because operations had to be temporarily shut down for safety concerns.
It's safe to say, though, that the industry has bounced back nicely. And shares of Carnival are up an impressive 120% just in the last two years (as of May 27). This monster gain can add to the bullish sentiment.
Here are three reasons to buy this resurgent travel stock like there's tomorrow.
Image source: Carnival.
1. Robust demand
When Carnival was forced to dock its ships, unsurprisingly, there was no way to service any demand. As a result, revenue took a major hit. This is no longer the case. In fact, Carnival has been experiencing tremendous momentum.
During the first quarter of fiscal 2025 (ended Feb. 28), revenue increased 7.5% year over year to $5.8 billion, which was a record. Net yields, a measure of the profitability of each available passenger day, were up 7.3% and another record. Carnival also saw record first-quarter customer deposits of $7.3 billion. This provides valuable visibility for the management team.
Other companies in the travel sector, like hotels and airlines, are mentioning a slowdown in demand. This hasn't been true with cruise lines broadly, and Carnival specifically. Part of the reason could be because cruises offer better value, as perceived by consumers, than other land-based travel options. This could make them less economically sensitive.
Additionally, the view that cruises are only for older people might be a flawed assumption. Younger consumers, as well as first-timers, are becoming more interested in taking cruise trips. Carnival can continue to ride this favorable tailwind.
2. It's cleaning up the finances
Thanks to Carnival now registering record levels of demand, its finances are starting to get in better shape. For example, the business increased operating income 97% year over year to $543 million in Q1, which was another record. This is obviously an encouraging trend, especially when you remember the fact that Carnival reported an operating loss of $1.5 billion in the same fiscal quarter exactly four years ago. The turnaround has been notable.
Wall Street believes it will be smooth sailing in the years ahead. Between fiscal 2024 and fiscal 2027, Carnival's operating income is set to increase at a compound annual rate of 8.3%, according to consensus analyst estimates.
The business is taking advantage of its improving bottom line to clean up the balance sheet. As of Feb. 28, Carnival had $27 billion of long-term debt. That figure was down from nearly $35 billion a little over two years ago. And Carnival just refinanced $5.5 billion of its debt, lowering annual interest expense by $145 million in the process.
To be clear, Carnival isn't out of the woods. It's not even close. When a company has a high debt load like this one, there will always be financial risk. However, the management team deserves credit for prioritizing paying down its debt and not brushing the issue to the side. It's also telling that the three major credit rating agencies have upgraded their assessments of Carnival over the past several quarters.
3. Carnival gives investors value
Despite the stock's incredible performance in the past couple of years, I think the valuation remains compelling. As of this writing, shares trade at a forward price-to-earnings ratio of 12.7. This represents a massive discount to the overall S&P 500 index.
Investors should consider adding Carnival stock to their portfolios. The combination of robust demand and revenue trends, coupled with higher profit potential, can work wonders, especially when the starting valuation is so low. Ongoing financial success will force the market to take a more positive view of the company.
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