Carnival plc (CCL) Ordinary USD1.66

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Carnival’s third-quarter revenue was up by $1bn to $7.9bn, with both ticket sales and ancillary revenues such as onboard spending rising around 15%.

Underlying cash profit (EBITDA) was up 27% to $2.8bn, helped by an increase in passenger traffic and pricing, as well as careful control of cruise-related costs.

Underlying free cash flow fell by $0.5bn to $0.6bn, reflecting lower levels of cash generated from operations. However, the full-year total is expected to be over $3bn, compared to $2.1bn in 2023. Carnival’s net debt was $27.3bn at the quarter-end.

2024 guidance for underlying cash profit was raised from $5.8bn to $6.0bn.

The shares were down 4.5% in afternoon trading.

Our view

Carnival’s strong momentum has carried over into its all-important third quarter. Perhaps even more encouragingly for investors, things are also looking good for the 2025 season and beyond, both in terms of bookings and pricing. We believe this, coupled with the moderating inflationary environment, leaves scope for next year’s consensus forecasts to be bettered.

But cruising can be a fickle business. So far Carnival’s navigated the conflict in the Red Sea and the temporary closure of its Baltimore port 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 guide the economy towards a soft landing on both sides of the Atlantic as inflation starts to ebb. And here there's still some uncertainty. But 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. The moderating inflation 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 $27.3bn, which is higher than Carnival's total market value, meaning that for now, it's very much debt holders who influence Carnival's course. Although the outlook for cash generation is encouraging, it could be a long while before that balance is redressed in shareholders' favour.

Despite the recent strong performance, the equity valuation remains a long way below the long-term average. Carnival is well-placed to have a good year, but it needs to have a few in a row to make a dent in its debt pile. And with consumers under pressure from all angles, that could still be a big ask.

Net debt is sitting at about 5x this year's EBITDA guidance. That's 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. 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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