CCL Stock Posts Record Quarter, But Guidance Spooks Investors

Carnival NYSE: CCL it just reported its second fiscal quarter, and it's clear from the numbers that the company is moving in the right direction. But warning signs of bad waters ahead unnerved investors.

Based on the latest figures, Carnival continues to make some of the strongest post-pandemic recovery in travel. For the three months ended May 31, Carnival posted record earnings, adjusted gross income, gross yield, and customer deposits. Despite the country's conflicts and high fuel costs, the company's revenue increased by more than 20%.

But the company's forward guidance did little to calm nerves, and that overshadowed an otherwise good quarter's performance. The stock fell sharply after the earnings announcement and closed the day down about 5%.

Many analysts still like the stock, but investors should realize that with real power comes risks.

Strong Quarterly Results Beat Expectations

Carnival's second quarter results were convincing. Net income came in at $537 million, 5% less than last year, although adjusted income, which excludes one-time items, came in at $569 million, up more than 21% year over year. Overall, revenue of $6.66 billion represented a 5.3% increase over the same period last year.

Adjusted EBITDA for the quarter was a record $1.58 billion, up from $1.5 billion a year ago. Diluted earnings per share (EPS) were 39 cents, and adjusted EPS rose more than 15% to 41 cents, from 35 cents in the year-ago period and above analysts' expectations.

The company also said it repurchased more than 450 million shares of company stock and, with a dividend yield of 2%, distributed $207 million in dividends in the latest quarter.

Healthy Margins Despite High Fuel Costs

While the headline numbers were impressive, the unit economy was also encouraging. Net profit at constant currency rose 2.2% in the quarter. Continued price guidance is also shown, such as adjusted daily transportation costs per bed, excluding fuel, which is basically fixed from year to year.

Predictably, fuel was the most visible cost challenge during the quarter. Carnival noted that the increase in earnings per share came despite higher fuel prices and currency movements, which reduced earnings per share by 6 cents, which equated to a total of $73 million in the quarter.

Taking into account the 30% higher fuel costs, the gross profit decreased by 3.9%. But with adjusted earnings still hitting records, the operating model appears to be holding.

Another highlight was a 5.6% improvement in fuel consumption per available day, indicating that operational efficiency has at least partially reduced price pressure.

Deleveraging Continues to Strengthen the Balance Sheet

The latest numbers also show Carnival's recovery continues after more than three years in the making. When the global travel industry shut down during the pandemic, Carnival took on massive debt to survive, suspended its dividends, and watched its stock plummet from the low $50s to nearly $7 in the space of a few months.

Its recovery has been methodical and convincing. As of May 31, long-term debt fell to $23.4 billion, continuing its gradual decline from $32 billion in late 2022. The company's interest expense improved in the latest quarter to $285 million from $341 million a year ago.

Strong Demand Faces External Risks

The rest of the year looks strong for the company, although concerns remain.

On the other hand, customer deposits, or money paid by consumers to book travel months in advance, reached a record $9 billion at the end of the quarter, up more than $450 million from last year's record. Overall, Carnival has booked 93% of its capacity and expects a full harvest for the rest of the year, the company's CEO said.

That positive outlook, however, comes with some cautionary concerns going forward. Ongoing tensions in the Middle East have significantly reduced Carnival's operations in the Mediterranean Sea, and concerns are widespread about demand and surplus yields going forward.

While second-quarter revenue came in above analysts' expectations, revenue slightly exceeded analysts' forecasts. Further volatility in popular destinations could continue to cut passenger bookings.

In addition, energy costs are constantly fluctuating which can change results quickly. And a disruption in weather, a major economic downturn, or a shift in consumer spending priorities could cause a downturn that isn't easy to reverse. The consumer discretionary sector is always subject to change, along with competitors, such as Royal Caribbean NYSE: RCL and Norwegian Cruise Line NYSE: NCLHthey increased their contributions.

Wall Street Remains Optimistic

Overall, though, Wall Street analysts like what they see. Of the 26 analysts covering the stock, the consensus rating is Neutral Buy with an average 12-month price target of $35.13 per share, up more than 20% from current levels.

Finally recovering from its slump of the past five years, shares have risen nearly 12% in the past three months. That drew even more attention after the backlash that occurred after Carnival reported second-quarter earnings—a reaction similar to what happened after its first-quarter report.

In total, 21 analysts recommend Buy, while five have the stock as Hold. The highest price target is $45, and the lowest price is $28.70 per share.

Carnival Appeals Strongly to Aggressive Investors

For investors, the choice seems clear. Carnival Corporation recently posted its best quarter ever by several milestones, and record customer deposit balances suggest that demand is unabated.

Aggressive investors willing to accept cyclicality and balance-sheet risk may find the stock interesting. For those who believe in the strength of consumer mobility, Carnival offers a combination of solid fundamentals, forward momentum, and logical upside.

Conservative investors looking for more than a 2% dividend yield, more predictable results, and greater balance sheet strength may prefer other options.

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