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Carnival Corp - revenue momentum fails to stem losses

Carnival reported third quarter revenue of $4.3bn, an increase over the previous quarter for the third time in a row and nearly 8 times the same period...

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Carnival reported third quarter revenue of $4.3bn, an increase over the previous quarter for the third time in a row and nearly 8 times the same period last year. Growth in onboard and other spending outpaced ticket sales. However, sales fell flat of analyst expectations of $4.95bn.

In August, ships were close to 90% full. For the period, passenger cruise days were up 55% quarter on quarter, to 17.7m.

Underlying cash profit (EBITDA) turned positive for the first time since the terminals re-opened for business. But is expected to, at best, break even in the fourth quarter due to seasonality and investment in advertising spend.

Interest payments and fleet upgrades contributed to a total underlying net loss of $688m, an improvement against a loss of $1.9bn in 2021.

Bookings for future cruises are "considerably higher than strong 2019 levels."

Free cash outflows were $882m (improved from $1.8bn in 2021). Net debt was up 11.2% to $27.0bn.

The shares were down 20.5% on the day.

View the latest Carnival share price and how to deal

Our view

Carnival is still growing its debt pile to fund ongoing losses. That's not a great place to be and the need to refinance in a higher interest rate world is another obstacle to the return to profit.

The third quarter showed a promising uptick in pleasure seekers booking trips on the high seas, and cross border volumes by the major credit card networks show that pent up demand for overseas travel is still holding firm. The question is how long can this last?

Bookings are doing well for now, but consumers are likely to feel the pinch if inflation persists. Revenue for the last quarter was still behind pre pandemic levels and the full year profit outcome is expected to be well into the red. But in 2023, the average analyst prediction suggests revenues will rise 73% to $21.4bn generating pre-tax profit of $718m. However with Carnival still loss making, it has to pedal hard to achieve these numbers.

Looking out to 2024 the projections are even more optimistic for earnings, with profits predicted to more than double off revenue growth of just 10.8%. That level of growth priced into the current valuation presents some risks. On the revenue side a prolonged cost of living crisis, and any uptick in unemployment, could jeopardise the appetite for travel. Similarly general inflation but also prolonged high fuel prices could see Carnival's gas guzzlers cause a further blow to profitability.

There are some positives. The move towards larger, newer, and more efficient ships should give margins a push in the right direction as passenger numbers continue to recover.

The industry's also a big contributor to carbon emissions and other pollutants. Carnival's looking to innovation to mitigate this through both the increased usage of biofuel blends, and a series of technology upgrades which are designed to reduce both fuel usage and greenhouse gas emissions - while also contributing to cost savings.

The forward valuation, based on revenues, is below historical norms reflecting the low earnings. There is scope for a positive re-rating but if Carnival hits any earnings icebergs that cause sentiment to worsen, the current valuation could be exposed.

Carnival key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 24th October 2022