Carnival’s first-quarter revenue grew 7.5% to a record $5.8bn, driven by increases in both ticket sales and onboard revenue.
Operating profit nearly doubled to $0.5bn, helped by tight control of costs and lower fuel expenses.
Free cash flow was $0.3bn compared to an outflow of $0.4bn reflecting lower levels of capital expenditure. Net debt came in at $26.2bn down from $26.3bn at the last year end.
The outlook for pricing has strengthened since December and the company has raised its underlying cash profit guidance, expecting “nearly 10%” growth to around $6.7bn for the year.
The shares were down 2.1% shortly after the announcement.
Our view
Carnival’s positive momentum in 2024 has continued in the early part of 2025. That prompted an upgrade to profit guidance for the year, but it wasn’t enough to keep the bulls happy on the day.
Given that underlying cash profit guidance has now merely caught up to consensus expectations we can’t help but think that the market was hoping for more. Still, with multiple records being broken in the first quarter it’s hard to knock progress, with some medium-term goals achieved a year early.
But cruising can be a fickle business. So far, Carnival’s navigated operational challenges and disruptions from regional conflicts with aplomb. But investors need to be aware that the industry can be particularly susceptible to a sudden change in fortunes.
The key question is how long will strong demand last? Much will depend on policymakers' ability to deliver a soft economic landing on both sides of the Atlantic. Stubborn inflation and a weakening growth outlook mean that this looks to be a much more elusive fairytale than it did at the beginning of the year.
The demographics of cruise passengers may provide some shelter from the storm should we see an economic slowdown. The cruise industry’s customer base tends to be dominated by the over-fifties. And there are some signs that consumer spending is holding up better amongst older generations.
Carnival is expanding its fleet slower than it has in the past, and we support this more cautious approach. A much-improved inflationary environment gives the company some headroom for promotional activity should the demand outlook soften. Meanwhile, ongoing moves to harmonise its brands also have the potential to enhance profitability.
But our biggest concern is the balance sheet which is still feeling the after-effects of the COVID-19 pandemic. Net debt currently stands at $26.2bn. At 3.9 times expected underlying cash profits (EBITDA), it’s looking more manageable than it has for a while. But that's still very high. Until it returns towards a low single-digit figure, there's unlikely to be a return of dividend payments to smooth investment returns.
Despite the recent strong performance, the equity valuation remains below the long-term average. Carnival is well-placed to have another good year, but it needs to have a few in a row to make a dent in the debt pile. And with consumers under pressure from all angles, that could still be a big ask. The high level of indebtedness means there's pressure for management to deliver, which increases the risk of ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
According to Sustainalytics, the company's overall management of material ESG issues is strong, with a robust governance structure and reporting framework in place. However, Carnival still faces significant exposure to risks linked to emissions, effluents and waste as well as quality and safety issues. Carnival has implemented carbon reduction programmes but shipping is likely to be one of the last forms of transport to be decarbonised.
Carnival key facts
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