After the tumultuous seas of early pandemic days, Carnival (NYSE: CCL) (NYSE: CUK) has sailed into calm waters. The world's biggest cruise operator recently reported a quarter filled with records, beat analysts' earnings estimates, and raised full-year guidance for a third time.
The recipe for such success? Carnival has put the focus on controlled spending, cost savings in key areas such fuel, and has made efforts to increase guests' onboard spending.
All this has helped Carnival, which had to halt sailings during the first stages of the pandemic, cruise back along the path to financial health -- and growth. Investors have recognized the company's progress, prompting the stock to climb more than 29% over the past year.
Moving forward, the stock could be in for more gains. This is thanks, in part, to Carnival's fantastic earnings performance, but another element may be even better news for shareholders.
First, let's take a quick look back in time at the challenges Carnival faced in recent years. The halt in sailings drove the previously profitable company to a loss, and resulted in Carnival building up a wall of debt. This also weighed on the shares, which plunged nearly 60% in 2020.
But Carnival set the sails in motion for recovery through various cost-saving efforts -- from limiting new ship orders to designing routes favoring fuel efficiency -- and travelers rushed back to this popular type of vacation as coronavirus restrictions eased. All of this has ushered Carnival along the path to this latest quarter's superstar results.
In the quarter, Carnival reported record operating income of $2.2 billion, record third-quarter revenues of $7.9 billion, and a cumulative advanced booked position for 2025 that's surpassed this year's -- and that's at higher cruise prices. Revenue and earnings per share both came in ahead of analysts' estimates for the quarter, too.
Finally, Carnival lifted its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance for the full year to $6 billion -- that's up by nearly $200 million from guidance, given a few months ago, and represents a 40% increase from last year. And the company also expects adjusted return on invested capital of 10.5%, a half-point better than earlier guidance.
All this is fantastic news and suggests more growth ahead for Carnival. But one other element represents even better news for the company and shareholders because it may help Carnival address its biggest challenge today: reducing debt. And that's the latest move from the Federal Reserve.
The Fed recently lowered interest rates by 50 basis points -- a greater-than-expected move -- and suggests it may cut rates two more times before the end of the year. The initial move represents the central bank's first such move in four years, and marks a path to lower costs for companies with high debt -- such as Carnival.
As it stands now, Carnival has managed a complicated situation well, with a focus on paying down variable-rate debt to make itself less vulnerable to interest rate fluctuations. "We will continue to look for more opportunistic refinancings over time," chief financial officer David Bernstein said in the recent earnings call. This suggests a lower-rate environment could significantly lower Carnival's costs over time and help the company reach its financial health goals.
Carnival has gradually improved its net debt-to-EBITDA leverage, a measure of a company's debt in relation to its cash flow, and considers itself "two-thirds" of the way to investment-grade status -- which it aims to reach in 2026. (Carnival also has prepaid debt, for example prepaying $7.3 billion in debt since the beginning of 2023.)
So yes, Carnival's earnings news is great for the company and investors, but the recent move by the Fed -- along with the idea that more rate cuts may be on the horizon -- could be an even brighter sign. This should offer the cruising giant an additional boost when it comes to reducing debt, an effort that will lead to smoother sailing for Carnival and its shareholders.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.