$CCL Sailing Smoothly Through The StormThe cruise line is showing positive signs of rebounding to pre-pandemic levels due to revenge travel that is continuing to rise. One of the companies benefitting from this phenomenon is Carnival Corporation & plc (NYSE: CCL) which reported record bookings in Q1 and Q2 2023. While the cruise line’s debt load poses a massive risk to the company, its stock could be a bargain at current levels ahead of its Q3 earnings set to be reported on September 29th. This is mainly due to the company potentially posting an EPS double of analysts’ estimates and its own management’s forecast. Based on this, investors could find value in CCL stock at its current PPS given that the cruise industry is forecasted to continue growing despite fears of a recession.
CCL Fundamentals
Q3 Forecast
It would not be surprising that the summer is CCL’s best season in terms of revenue. As is, last year the cruise line’s revenues almost doubled from $2.4 billion in Q2 2022 to $4.3 billion in Q3 2022. This year, the company posted revenues of $4.9 billion in Q2 2023. That said, it may witness a major increase in its upcoming Q3 revenues since its Q3 spans from June to August which is also known as the cruise line season.
According to CCL’s latest Q2 earnings call, its management expects a return to profitability in Q3 for the first time since the pandemic – forecasting an EPS in the range of $.7 – $.77 – driven by revenue growth. Meanwhile, analysts forecast the company’s Q3 EPS to come in at $.76. With this in mind, the cruise line has the potential to post an EPS nearly double both management and analysts’ forecasts due to its customer deposits.
In Q1 and Q2 2023, CCL reported record bookings which reflected on its customer deposits. The world’s largest cruise line reported all-time high customer deposits of $7.2 billion in Q2 2023, and given that there is a correlation between its customer deposits, it is easy to project its Q3 revenues and EPS.
But first, investors should note what customer deposits represent. In simple terms, customer deposits are initial deposits made by guests to confirm their reservations. This cash received from guests in advance of the cruise is recorded under other long-term liabilities on the company’s balance sheet.
Since the cruise line industry is returning to its pre-pandemic form, it is suitable to use the 3 years prior to the pandemic to forecast the company’s revenues. Over that period, Q3 ticket revenues represented on average 81.8% of Q2 customer deposits. Taking this into consideration, CCL’s Q3 ticket revenue can be projected to be $5.88 billion.
Year Q2 Customer Deposits Q3 Ticket Revenues Q3 Revenue % from Q2 Customer Deposits
2017 $4.7 Billion $4.1 Billion 86.6%
2018 $5.3 Billion $4.3 Billion 82%
2019 $5.8 Billion $4.4 Billion 76.9%
2023 $7.2 Billion *$5.88 Billion *81.8%
That said, CCL also reports onboard and other revenue which is derived from guests’ purchases on the cruise. Over the same 3-year period, onboard and other revenues represented on average 37.3% of ticket revenues. In this way, the cruise line’s onboard and other revenues can be projected to be $2.19 billion. Adding both revenue streams, CCL’s total Q3 revenue projection would be $8.07 billion – a record for the cruise line.
Year Q3 Ticket Revenues Q3 Onboard & Other Revenues Q3 Total Revenues % Of Onboard & Other Revenues From Ticket Revenues
2017 $4.1 Billion $1.3 Billion $5.5 Billion 33.2%
2018 $4.3 Billion $1.4 Billion $5.8 Billion 34%
2019 $4.4 Billion $2 Billion $6.5 Billion 45.9%
2023 *$5.88 Billion *$2.19 Billion *$8.07 Billion *37.3%
After projecting the cruise line’s Q3 revenues, it is time to project its operating costs. Over the 3-year period prior to the pandemic, CCL’s operating costs represented on average 99% of its ticket revenues. This means that its Q3 operating costs can be projected to be around $5.82 billion.
Year Q3 Operating Costs Q3 Ticket Revenue % Change
2017 $4.1 Billion $4.1 Billion 100%
2018 $4 Billion $4.3 Billion 93%
2019 $4.6 Billion $4.4 Billion 104%
2023 *$5.82 Billion *$5.88 Billion *99%
Now is the time to address the elephant in the room, interest expenses. One of the reasons many investors are bearish on CCL is its debt load of nearly $32 billion. The cruise line accumulated this debt to stay afloat during the pandemic since its operations stopped. As a result, the company’s bottom line has been majorly affected by the interest payments on its whopping debt. This year, CCL paid $539 million and $542 million in interest in Q1 and Q2 2023 respectively. Based on this, the company’s Q3 interest expense can be forecasted to be around $540 million. In addition, the company paid taxes of $7 million and $5 million in Q1 and Q2 2023 respectively, which could indicate that its Q3 tax expense may be in the region of $6 million.
Adding all of these projections together, CCL’s Q3 2023 net income projection would be $1.7 billion or an EPS of $1.34 – nearly double analysts’ estimates and management’s guidance.
(in billions except EPS)
Revenues $8.07
Operating Costs $5.82
Interest Expense $0.540
Tax $0.006
Net Income $1.704
Outstanding Shares 1.27
EPS $1.342
What is Next For the Cruise Line Industry?
With the current macro environment, many are arguing that the cruise line industry may witness decelerating growth or even declining growth due to consumers trying to cut their spending. That said, the cruise line industry has historically shown its resilience in the face of economic, social, political, or any other crises that normally challenge the tourism sector.
During the global financial crisis of 2008 – 2009, maritime cargo shipping suffered greatly, however, cruise lines and cruise ports continued experiencing rising numbers of guests. Looking into CCL closely, the company’s passengers increased in the period between 2007 to 2009 from 7.67 million in 2007 to 8.52 million in 2009 which is an 11% increase. Therefore, fears of companies like CCL suffering from a potential recession may be overplayed by investors.
On that note, the cruise line industry is expected to continue on its positive trajectory over the coming years due to the increase in demand for cruises. According to the Cruise Lines International Association, 85% of travelers who have cruised will cruise again which is 6% higher than pre-pandemic. As is, CLIA projects this year’s cruise passengers to reach 31.5 million this year and grow to 39.5 million in 2027 – a 25.4% increase. Considering that CCL is the world’s largest cruise line, CCL stock’s future appears to be bright, and as such, its current PPS could prove to be a bargain for long-term investors.
Technical Analysis
On the hourly chart, CCL stock is in a bearish trend with the stock trading in a downward channel. Looking at the indicators, the stock is below the 200, 50, and 21 MAs which is a bearish sign. Meanwhile, the RSI is approaching oversold at 34 and the MACD is approaching a bullish crossover. With that in mind, accumulation recently witnessed an uptick which could be a sign that buying pressure may come soon.
As for the fundamentals, the company’s upcoming Q3 earnings report on September 29th is a major catalyst since the company has the potential to post an EPS nearly double analysts’ estimates. Since CCL stock is trading near the lower trendline of its downward channel as well as its support, the current PPS could be a good entry point ahead of the company’s earnings.
CCL Forecast
Despite the growing fears of the macro environment negatively impacting the cruise line industry, the industry has historically shown its resilience against economic hardships. As is, it is expected that cruise line passengers will increase by 25.4% by 2027 which would benefit CCL the most since it is the world’s largest cruise line. As the company set to post its Q3 earnings on September 29, CCL stock may experience a run as the cruise line has the potential to report an EPS nearly double analysts’ estimates and management’s guidance. With the stock trading near support, it might be a profitable decision to go long on CCL stock.
