With less than a month left in the year, the S&P 500 is up 26%, interest rates are being cut, and Donald Trump is getting ready to return to the Oval Office. Although the stock market is looking a bit bloated, there's a feeling of buoyancy with strong market indicators.
That could fuel further gains in 2025, but it could also lead to a correction at some point. Either way, Carnival (NYSE: CCL)(NYSE: CUK) is poised to rise in the new year and the long term. Here are three reasons why.
Carnival continues to field unprecedented and unrelenting demand for its products. Revenue has surpassed prepandemic levels and is still climbing, and all the signs indicate that it will keep it up for the foreseeable future.
In the 2024 fiscal third quarter (ended Aug. 31), revenue increased 14% year over year to $7.9 billion, which was already a record last year. It's entering 2025 in its best-ever booked position, with less remaining inventory than last year, and it's even booked out into 2026 with its best-ever rates. Because of the low inventory, it's also booking out at high ticket prices. It's ordering new ships and changing routes to meet demand where it's strongest.
Scale is helping Carnival return to profitability. It hasn't fully gotten there yet, but it reported positive net income of $1.7 billion in Q3. Operating income was $2.2 billion, up $554 million from last year. It raised guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and return on invested capital for the full year. Increasing adjusted EBITDA is driving increasing operating cash and free cash flow, and Carnival is getting into a better financial position.
Carnival stock has been on the rise since the Federal Reserve announced that it's cutting interest rates. This helps Carnival in two ways.
One is that lower interest rates boost the economy, since people and businesses can borrow money more easily. People who have been putting their dream cruise on hold are more likely to splurge in a more active, lower-interest-rate economy. Carnival is more likely to keep up its strong demand in the looser economy.
What's even more on investors' minds, though, is Carnival's high debt. It ballooned when Carnival had no money coming in and needed funds to keep going. Carnival has been in a precarious position since then, even though its business has rebounded and revenue is reaching record levels. It has been paying debt off steadily, reducing it through prepayments, restructuring, and getting rid of the highest-interest notes.
The fear has been that demand will slow before Carnival can reduce the debt to a manageable level. But as revenue soars and the company generates more cash, it looks more likely that it will be able to get it down to a reasonable level. Now, with lower interest rates, investors are feeling more comfortable with Carnival's ability to pay off the debt in an acceptable time frame.
Carnival stock trades at a price-to-sales ratio of 1.3 and a forward one-year price-to-earnings ratio of 15. That's an objectively cheap valuation, but valuations are never objective. With its high debt and unreliable earnings, Carnival stock doesn't earn a premium.
However, the story keeps getting better. The stock will be able to justify a higher valuation as the fundamentals improve. So if, for example, earnings continue to increase with greater stability, the price won't just go up along the same increase -- it can rise faster.
The near term is still uncertain, and the most risk-averse investors might want to wait. But most investors can feel comfortable taking a position in this industry leader's stock at today's prices.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.