Carnival (LSE:CCL) shares have gone through difficult times since the start of the Covid-19 pandemic. In 2022, the stock plummeted by 58.2%, that’s over half of its value at the start of the year. The story seems to be changing in 2023, as the stock has undergone a 1.25-fold increase to date. That notwithstanding, the Carnival shares are still far away from their pre-pandemic levels. Is it on its way to recovery, and does it give my portfolio a good bargain? Let’s explore.

Key Points

• All nine Carnival brands have resumed guest cruise operations.
• Carnival Corporation is one of the largest cruise operators in the world.
• Management hit its target to have its fleet in full operation for summer 2022. 

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What does Carnival do, and how does it generate revenue? 

Carnival Corp and Carnival Plc exist as dual-listed companies in the United States and the United Kingdom, respectively. The businesses of the two entities are combined through a number of contracts, Articles of Incorporation, and By-Laws, respectively. Carnival Corporation & Plc operates as if they are a single economic enterprise with a single executive management team and identical Boards of Directors. But each firm maintains its single identity. Both companies are listed separately on the New York Stock Exchange and London Stock Exchange with their own separate shareholders. What does the company do, then?

Carnival is one of the world’s largest leisure travel companies, with operations in North America, Australia, Europe and Asia. It operates through the following segments: North America and Australia (NAA), Europe and Asia (EA), Cruise Support and Tour and Other Segments. The cruise brands are Carnival Cruise Line, Princess Cruises, Holland America Line, P & O Cruises, Seabourn, Costa, AIDA, P&O Cruises (UK) and Cunard. Some of these brands have sailed the world spanning over a century. 

Why did the Carnival share price fall

At the start of Covid-19, most businesses were forced to close down to curtail the spread of the virus. This was where Carnival found itself, as its businesses were closed down in 2020. With no running operations, the revenue stream almost entirely evaporated, resulting in an enormous cash burn to cover the maintenance expenses for its fleet and employee salaries.

Consequently, Carnival shares experienced a massive selloff, which was only exacerbated after management cancelled the dividend. Before Covid-19, the Carnival stock price traded above 3,600p per share. By early April 2020, the company’s share went as low as 581p – an 80% crash within a few months.

Today, the stock is still far away from its pre-pandemic levels, trading at around 1,180p. So, is now the time to add this firm to my portfolio?

A bull case for the Carnival shares?

In its 2021 Strategic and Financial Report, management reported the milestones it achieved in 2021. This includes ending the year with:

• 50 ships in guest cruise operations compared to one ship in 2020.
• Returning over 65,000 crew members to their ships.
• Carrying over 1.2 million guests.

As of 13 January 2022, eight of the company’s nine cruise brands, which is 67% of capacity, had resumed guest cruise operations. The company expects to have its full fleet back in operation for the summer season, where it historically generates its largest operating income.

It won’t be surprising to see Carnival shares continue to steadily recover as operations resume. Having said that, there are some serious risks which I’m cautious of.

Carnival has missed both earnings and revenue estimates in eight of the past ten quarters. Though the company managed to beat on earnings and revenue in its latest results released 27th March 2023. Aside from that, the company has burned cash on the maintenance of its cruise ships without generating revenue for a prolonged period.

This condition changed as the company resumed the operation of its cruise lines. But the debt pile has increased drastically. And with foreign exchange rates becoming increasingly volatile due to the geopolitical situation in Eastern Europe and the Russia-Ukraine war, Carnival’s international profits could become compromised.

Is the tide changing for Carnival shares?

Carnival Corporation reported a US GAAP net loss of $407 million, or $(0.32) diluted EPS, and adjusted net loss of $395 million, or $(0.31) adjusted EPS. That is better than the March guidance range of $425 to $525 million net loss predicted for the second quarter of 2023.

Meanwhile, the company reported record second-quarter revenue of $4.9 billion. In addition to it, there was a continued acceleration of demand, with total bookings made during the quarter reaching a new all-time high for all future sailings.

Furthermore, total customer deposits reached an all-time high of $7.2 billion (as of May 31, 2023), surpassing the previous record of $6.0 billion (as of May 31, 2019) by over $1 billion, a 26% increase compared to the prior quarter. Cash from operations and adjusted free cash flow turned positive in the second quarter of 2023. The company expects continued growth in adjusted free cash flow to be the driver for paying down debt over time. The second quarter of 2023 ended with $7.3 billion of liquidity.

Needless to say, Carnival is regaining its financial strength. And with cash flows being restored, is now the time to buy Carnival shares?

Should I buy Carnival shares today?

At the current price, Carnival shares give my portfolio a great bargain. At least, that’s what I think. The company has returned to full operations and has even been adding some new cruise ships to its fleet. Needless to say, this will add to its carrying capacity, which will, in turn, lead to more revenue for the company, suggesting its future performance looks far brighter.

The debt situation is concerning, and investors should recognise that it could take several years to fix. However, assuming operations resume as planned, the company seems to be on track to resolve this weakness over the long term. Therefore, I am considering this business for my portfolio today.

Learn more about Carnival shares

• The Carnival share price doubled. Should I buy now?

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.