Few stocks were hit as hard by the pandemic as Carnival (NYSE: CCL) , the world's largest cruise line operator. Carnival shares rebounded substantially from the nadir during the pandemic as the stock has more than doubled from its low two years ago.
However, the travel stock arguably still has a lot of ground to make up as it's still down 65% from its pre-pandemic levels.
Is it too late to buy Carnival or will the stock keep moving higher? Let's take a look at where the travel leader stands after its latest earnings report.
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Quarterly results are looking good
Like most of its peers, Carnival has benefited from a strong rebound in travel demand, but while online travel agencies are starting to see that boost fade, Carnival continues to deliver impressive growth.
In the just-reported fiscal third quarter, revenue hit a new record of $7.9 billion, up 15% from the quarter a year ago, which was better than the analyst consensus at $7.83 billion.
Carnival continued to gain leverage as it's streamlining its business and benefits in a healthy environment from high operating leverage, meaning high fixed costs and low variable costs. In the third quarter, generally accepted accounting principles ( GAAP ) operating income jumped 34% to $2.18 billion. The company has also been able to reduce its interest expense over the last year from $518 million to $431 million. It should continue to gain leverage from falling interest expense as it pays down debt and benefits from falling interest rates.
Net income in the quarter jumped more than 60% to $1.7 billion, and earnings per share rose from $0.79 to $1.26, or $1.27 after adjustments, which beat estimates at $1.16.
Future trends look strong
Demand is crucial in the cruise industry as pricing, or yield as it's known in the industry, can rise or fall fast, which has an outsize impact on the bottom line.
Because of that, it's important for Carnival to maintain strong booking trends. And it seems to be doing just that as yield is expected to rise 5% in the fourth quarter in constant currency and 10.4% for the full year.
Because the business is inherently capacity-constrained, much of that price increase flows directly to the bottom line, and management noted on the earnings call that strong bookings no longer owe to pent-up demand in the recovery.
Management also said that booking volumes remain robust for 2025 at higher prices and advanced bookings for next year are in a better position than they were a year ago.
The macro impact
Carnival, like the rest of the cruise industry, remains sensitive to the macro environment, and a recession would have a significant impact on the business.
However, with interest rates falling in the U.S. and much of the world, Carnival looks set to derive a tailwind from the macro economy especially as the Federal Reserve expect to continue cutting interest rates over the next year. This will lower Carnival's interest payments on its variable-rate debt, and give it an opportunity to refinance its fixed-rate debt.
Additionally, lower rates will encourage consumer spending and boost the overall economy, favoring Carnival.
Is Carnival stock a buy?
Despite the solid third-quarter results, investors sold the stock on the news due to slower yield growth in the fourth quarter, which investors fear could be a trend.
However, Carnival looks like a good buy after the report with a price-to-earnings ratio of 16, which seems a good price considering that bottom-line results are still soaring. Meanwhile, the company has several new ships coming online in the next few years and the opening of Celebration Key, its new private destination on Grand Bahama Island.
There's still a lot of growth ahead for Carnival. If the economy remains stable, the rest should take care of itself, making Carnival stock a winner.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy .
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