Carnival’s third quarter revenue grew by 3.3% to $8.2bn, despite a small drop in passenger numbers.
Underlying cash profit (EBITDA) increased was up by 6.1% to $3.0bn helped by improved gross margins and fuel efficiency.
Free cash flow improved from $0.6 to $0.7bn. Net debt was $1.5bn lower at $24.7bn.
Carnival has increased its full-year underlying EBITDA guidance from $6.90bn to $7.05bn.
The shares were down 2.00% shortly after the announcement.
Our view
Carnival’s third quarter results marked its tenth consecutive period of record revenue. Despite a small upgrade it felt like investors were expecting more on the day. While next season’s bookings remain ‘strong’, tough comparatives are making it difficult to push the boat out further.
Fleet expansion is one way to reinvigorate growth, but there are no launches planned until 2027. Remember, cruising can be a fickle business and there’s no guarantee that demand will align with planned capacity growth. Geopolitical unrest and economic uncertainty are the key risks to monitor here.
There are some signs that the elusive soft landing for the global economy has begun, but whether that’s sustainable remains to be seen. The outlook for world peace is a much harder call to make, with tensions in the Middle East, as well as those between Russia and Ukraine still running high. It's not only demand that can suffer from high conflict levels, but also marine fuel prices, a key cost for Carnival’s thirsty cruise liners.
The demographics of cruise passengers may provide some shelter from the storm should conditions deteriorate. The cruise industry’s customer base tends to be dominated by the over-fifties, an age-group that is proving to be highly resilient when it comes to spending on travel.
That’s just as well. A stretched balance sheet means there’s less wiggle room if cash flows start to move in the wrong direction. Net debt currently stands at $24.7bn. At 3.5 times expected underlying cash profits (EBITDA), it’s still very high but looking more manageable than it has for a while. Until it returns towards a low single-digit figure, there's unlikely to be a return of dividend payments to smooth investment returns.
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. Management can take a lot of credit for delivering a robust and sustained recovery from the significant damage inflicted by the COVID-19 pandemic.
But we think the performance has been broadly recognised by a rebound in the valuation. While we’re impressed by the ongoing delivery, a slowing growth trajectory and lack of near-term catalysts means there’s additional pressure to deliver.
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.
Carnival key facts
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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 LSEG. 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.
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