Carnival(NYSE: CCL)(NYSE: CUK) hasn't been immune to investors' worries about President Trump's latest taxation plans. In fact, two elements in particular have weighed on appetite for the cruising giant over the past several weeks.
First, following comments by Commerce Secretary Howard Lutnick, investors were concerned the Trump administration may increase taxation on cruise companies. Second, the president's current plan to tax imported goods may weigh on consumers' buying power -- and that could hurt demand for cruises.
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All this has pushed Carnival's share price lower, leaving the stock down 27% so far this year. This is in spite of fantastic revenue growth in recent quarters, high demand for the company's cruises, and solid progress paying down debt.
Considering the full story, does Carnival's price today represent a once-in-a-lifetime buying opportunity before the stock goes parabolic? Let's find out.
Image source: Getty Images.
Potential troubles ahead
We'll start by looking at the potential troubles on the horizon. Though cruise companies pay certain U.S. taxes, they generally are registered in foreign countries, so they aren't responsible for federal income tax in the U.S. The commerce secretary, in an interview on Fox News earlier this year, said the situation will change with Trump in office, and taxes will be paid. Further details weren't provided, and the government hasn't yet moved forward on a plan -- but the risk has been weighing on cruise companies.
And in recent weeks, Trump's announcements of tariffs on imports worldwide have shaken stocks across industries -- including the cruise sector. The concern for companies like Carnival is that the consumer -- facing higher prices on essentials and general merchandise -- will rein in spending on nonessentials. And that could mean staying home or choosing a cheaper vacation instead of booking a cruise.
As mentioned, all this has weighed on Carnival's stock in recent times. These policy decisions are a concern and could increase the costs of Carnival and other cruise companies. But it's also important to consider the company's growth in recent times and future prospects.
Carnival's recent successes
Carnival suffered during early pandemic days, shifting to a loss and taking on debt as cruising came to a temporary halt. But over the past few years, Carnival has turned things around by cutting costs, increasing efficiency, focusing on paying down debt, and advancing along on its sustainability and growth plan known as "SEA Change."
The company recently reported record first-quarter revenue and operating income -- and operating income of $543 million was nearly double its level during the same period a year earlier. Booking volumes for next year and later also reached record levels, and the company says it expects to reach its SEA Change financial targets this year -- a year earlier than expected. This involves gains in both earnings and return on invested capital.
In calm waters (excuse some of my puns here), all of this bodes well for Carnival's future. But risks of higher taxation directly on cruise companies or the impact of tariffs on cruise customers could rock the boat.
Is Carnival a buy?
So, what does all this mean for you as an investor? Is Carnival, at today's level, a once-in-a-lifetime buy before going parabolic -- or will tariff and taxation turmoil keep this stock in the doldrums?
Until we know exactly what will happen with taxation and tariff plans, Carnival stock may not soar. Investors want to know how these issues, if they actually result in concrete plans, may impact the company -- and how the company aims to manage them. So, you may have time to get in on Carnival at today's reasonable valuation of less than 10x forward earnings estimates.
Now, let's think long term. If the government increases taxation directly on cruise companies, it may not necessarily be at levels that will significantly hurt earnings. At the same time, Trump's tariffs could weigh on the economy to some degree in the near term, but this isn't likely to cause a slowdown that will last forever. The market and the economy go through cycles, so at a certain point we will see a dip, but history shows us improvement and gains always have followed.
All this means that Carnival stock may not take off immediately, but the company, considering its accomplishments in recent quarters and the overall popularity of its cruises, still is well positioned to excel over time. I think Carnival stock will go parabolic -- even if this doesn't happen in the near term.
So, for the long-term investor, Carnival does represent a once-in-a-lifetime buying opportunity -- even if this opportunity lasts a while.
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