Carnival plc (CCL) Ordinary USD1.66

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Carnival reported record fourth-quarter revenues of $5.9bn, up by 10% on last year due to increased ticket prices and onboard spending.

Underlying cash profit (EBITDA) grew by 29% to $1.2bn, exceeding guidance by $80mn. This reflected both the uplift in revenue and tight controls.

Underlying free cash flow rose from $240mn to $366mn, benefitting from lower expenditure on investment. Net debt was down by $1.9bn to $26.3bn.

Booking volumes in the fourth quarter increased, despite a reduction in capacity. In 2025, Carnival expects an uplift of around 8% in underlying cash profit to $6.6bn.

The shares were up by 3.5% in afternoon trading.

Our view

Carnival’s had a strong end to 2024, providing an extra boost to investor sentiment which has already recovered strongly so far this year.

Perhaps even more encouragingly for investors, things are also looking good for the 2025 season and beyond. Management is confident of hitting financial targets ahead of schedule, helped by strength in both bookings and pricing. We believe this, coupled with the improved inflationary environment, leaves scope for this year’s guidance to be bettered.

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 now that inflation has come down to a more tolerable level. But here there's still some uncertainty.

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 $26.3bn. At 4.3 times 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.

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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