Dismal Third Quarter Sinks Carnival Shares

No-moat Carnival (CCL) (CUK) reported worse-than-expected fiscal third-quarter results, delivering adjusted EBITDA of just $300 million, well below the more than $1 billion we had forecast. Although 95% of the fleet was deployed and occupancy was 84%, Carnival remained plagued by higher costs related to COVID-19 protocols and near-term pricing pressures as it continues to book a higher proportion of close-in itineraries and digest future cruise credits. Moreover, the firm’s fourth-quarter outlook for around breakeven EBITDA is significantly lower than the $570 million we had forecast. We believe the slower trajectory to restored profitability is the primary culprit behind the shares tumbling nearly 20% on the day of the release. However, we think concerns about a return to consistent profitability should alleviate in 2023, given that cumulative advance bookings and pricing (normalized for FCCs) are already above 2019 levels. This should permit our 2023 EBITDA outlook to approach 2019 (prepandemic) levels again.

We may lower our $24 (GBX 1,980) fair value estimate by $1-$2 for near-term occupancy and pricing softness relative to historical levels. While Carnival remains a show-me story considering its bloated debt-service costs and increasing consumer uncertainty, we think investors with a longer time horizon could benefit from taking a sail in the shares. Underlying our long-term outlook are net revenue yields that rise 2% and costs that rise 1% (a bit higher than the 1% and 0.5% averages, respectively, posted in the decade before the pandemic). We think such metrics are achievable, given the rationalization of the fleet in recent years, as Carnival sold or scrapped 23 ships, leaving those in the mix with a better composition of rooms (more verandas) and lower maintenance demands with higher efficiency (helped by scale). As such, we forecast Carnival achieving more than 30% EBITDA margins ahead, above the high 20s it captured before COVID-19.