Where Will Carnival Stock Be in 5 Years?

This year has seen modest gains for Carnival Corporation (NYSE: CCL), with shares up 15% so far. But while the cruise line's revenue and earnings now exceed pre-pandemic levels, an extremely overleveraged balance sheet remains a cause for concern. Let's discuss how the next five years could play out for this iconic cruise company.

The US economy isn't as bad as you might think it is

If you spend a lot of time on major social media platforms like YouTube or TikTok, you can be forgiven for assuming America is in another Great Depression. But while years of above-average inflation have eroded consumer-purchasing power, large segments of the population are still spending like there is no tomorrow. Luxury-experience providers like Carnival Corporation are a major beneficiary of this trend.

Third-quarter earnings for the cruise line rose 15% year over year to a record $7.9 billion, driven primarily by passenger-ticket sales. The company is also using its vessels more efficiently with better occupancy and less downtime, helping power a dramatic 34% jump in operating income to $2.2 billion.

CEO Josh Weinstein expects momentum to continue in 2025 and 2026. And if that happens, Carnival will be on track to pull off SEA Change -- its three-year plan to dramatically reduce emissions, increase earnings before interest, taxes, depreciation, and amortization (EBITDA), and increase the return on invested capital (ROIC), which is a measure of how well a company generates profits from the cash invested into its business.

However, one goal may be even more important than all of these: reducing debt.

Carnival's debt load remains alarming

While Carnival's revenue and operating income have exceeded pre-pandemic levels, the cruise company's stock is still 68% below its all-time high of $66, reached in early 2018. This discrepancy has a lot to do with its long-term debt, mostly accumulated during the crisis.

As of August, Carnival's balance sheet had $26.6 billion in long-term debt. While this is down by almost $2 billion from the prior-year period, it is still extremely high compared to cash and equivalents of just $1.5 billion. For investors, overleverage comes with a host of problems, including interest expense, which totaled a whopping $431 million in the third quarter alone. Over a full year, this could add up to a $1.72 billion hit to net income.

Image source: Getty Images.

On top of interest expense, the debt principal also has to be paid down -- with the sum ramping up from $1.8 billion in 2025 to a staggering $8.8 billion in 2028. This is money that could have otherwise been reinvested into Carnival's business or returned to shareholders.

However, the good news is that management can easily kick the can down the road by refinancing the debt. This would involve taking on new loans and lower interest rates to pay off older (typically higher-interest) notes when they come due. And with the federal funds rate on a downward trend, this should be relatively easy for Carnival to pull off.

Is Carnival stock a buy?

While Carnival Corporation has an alarming amount of debt, its rapidly improving operations and profitability mean it can likely grow out of the problem. And with a forward price-to-earnings (P/E) multiple of 13, the stock trades at a huge discount compared to the S&P 500 average of 25.

It's impossible to predict how much longer the American consumer will be willing to spring for high-priced luxury experiences. However, unless the macroeconomic environment changes, Carnival stock finally looks positioned to outperform over the next five years and possibly beyond.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.