Carnival holds course on cutting debt and boosting margins

True! The indicator - is the comment of several experts - would still be at a level that is not low. And yet, other analysts retort, the important thing is to see and monitor that the trend of deleveraging continues. In other words: it is not so much the static number itself that is relevant, but the future dynamics of the indicator. Which - clearly - must continue to fall. As - moreover - Carnival itself says it expects.

Yeah, forecasting. The indication on 'Net debt to Ebitda' also comes from the increase in cash flow. In the three months ending 31 May, the group realised 1.3 billion in adjusted free cash flow (625 million a year earlier). For the full six months, on the other hand, cash flow stood at USD 2.66 billion (USD 769 billion in the same period last year). The increase is in the numbers, and the boost comes in particular from operating cash and, thus, from business expansion.

In this last respect, it is worth remembering that the company - like the entire cruise industry - has put a terrible period behind it. In 2018-19, the financial year before the outbreak of the Covid pandemic, Carnival's GAAP net profit had been 3 billion. In 2019-2020 and 2020-2021, by contrast, the group posted a loss of 10.2 and 9.5 billion respectively. Gradually, the situation improved until 2022-2023, where the Miami-based group actually ended the year at break-even (-0.07 billion loss under GAAP accounting). In the last quarter, there was a return to net profit. Profit was 92 million (134 million adjusted), an increase of about 500 million from a year earlier. This result, as well as the revenue (5.8 billion), was above consensus estimates and surprised the market.

So much so that Carnival's stock on the stock market, in the session following the presentation of the data, jumped up. This increase is a consequence of the same new upward revision of guidance for 2023-2024. Adjusted EBITDA is expected to settle at $5.83 billion, while net profit (also adjiusetd) is forecast at around $1.55 billion ($275 million better than the guidance offered in March). The adjusted return on capital employed (the so-called Roic) is, for its part, expected to be around 10%. More in the short term - i.e. in the third quarter of the fiscal year - Carnival estimates, on the other hand, net profit and adjusted EBITDA to be around $2.66 billion and $1.58 billion respectively. These are upward numbers which, among other things, are the effect of the high level of travel bookings on the one hand (the group indicates that it is continuing to accelerate in 2025); and, which, on the other hand, allow Carnival to claim that it is already two-thirds of the way to its 2026 targets which, among others, indicate an adjusted Roic of 12%.

All as easy as sailing on a calm sea, then? The reality is more complicated. Some experts, recalling the cyclical nature of the cruise business, point out the risk of a possible slowdown in the US economy (and beyond). On this front the debate is heated. In general, the ship holiday sector is expected to grow (according to Statista the Cagr between 2024 and 2029 is 4.8%). Nevertheless, there are those who - in fact - claim that the contraction of families' spending capacity, as shown by the indications coming from realities such as AirBnB or Marriot), is weakening the demand for land travel. And it also risks weakening that of sea holidays. The concern, however, is not shared by all. Particularly because cruises would represent a cheap mode of travel which, moreover, is attracting new categories of customers (e.g. Generation X). In addition, some experts point to the persistently high leverage.

True! This, as described, is on a continuous downward trend. Moreover, thanks in part to revenue expansion and operational efficiencies, profitability and - above all - cash flow are on the upswing. Finally: Carnival's global presence (according to Cruise Market Watch it has over 42% of the world's passengers) and its articulation - both geographically and by customer type - make the business more resilient. That said, however, the concern is that a negative external variable - given the still high debt - could have an impact. Above all, on the stock market share.

Those shares that (as of 19/9/2020), more over the long term, are discounting the Covid imaptto (over the five-year period, the drop is 62%). Shortening the time span considered, the dynamics change: in the last year, for example, Carnival rises 21.6%. In this context, according to Seeking Alpha, the prospective Ev/Ebitda is 8.27 times while the non-GAAP P/E (also prospective) is 15.5. These values are lower than those of Royal Carribean, for example, with reference to the ratio between Enterprise Value and EBITDA (11.47 that of the latter) and more or less in line with respect to P/E. Carnival's price-to-earnings multiple on operating cash flows, on the other hand, is lower. In short, according to the experts, the shares do not seem that expensive. But, evidently, the do-it-yourselfer has to remain very, very cautious about such a reality.