Carnival's business model works beautifully when demand is strong. And in the last 15 months the market has erred on the side of conservatism and generally gotten it wrong. As a result, Carnival shares have often spiked after earnings.
Based off of the rollicking start to this year, I suspect Carnival make a pretty solid GAAP profit in 2024. Demand seems to be crazy hot and the valuation (even now) seems reasonable (using enterprise value to capture the full capital structure). But shareholders will have to be in it for the long-term. Profits won't really make it back to shareholders in coming years. Management would be mad to pay a dividend or buy back stock.
Yes, if the opportunity arises, management can probably buy back debt at discounts to face and realise noncash profits (but that possibility may be going)... but that only slightly reduces interest expense given Carnival's capital structure. It has to be a steady, calculated approach that management take and it'll take a long time before shareholders fully reap the benefit.
Barring any other unusual event I suspect Carnival will be able to delever the balance sheet - but not nearly as quickly as I thought last year. It'll take many, many years and those pre-pandemic returns shareholders saw are unlikely.
Refinancing will be interesting, too. Management have made it clear they want to improve their credit rating and bonds have also continued to improve since April 2023. What will the net effect on interest expense look like? I haven't got to a conclusion yet.
Question is whether, at some point, demand drops off and that results in the interest expense being too burdensome. I remember going back to 08 and 01. It never really did at that point and, frankly, today, travel seems strong. You'd need something really polarising (yes, I've used that word intentionally) for travel demand to really drop off.
I don't really think that the post-pandemic effect on travel has worn off - maybe slowing, but very much there. People are still travelling crazily to the point that MGM are able to buy back more than 10% of their shares for two consecutive years. Even the timeshares are able to buy back stock at insane rates (VAC, TNL)! Of course, the likes of EXPE, too... the conclusion seems obvious.
To conclude, I'd be bullish CCL at this point. Don't own any shares, though. No space. The woes of a small investor...
On a personal note, just to highlight the extent of "travel fever" with us:
I'm going to India for a month with friends and then we're going as a family to Singapore. In the last year and a half (since Covid restrictions were totally lifted), I've averaged a little more than 2 countries a year. None of this has been cheap (in fact, the opposite).
And I still want to spend a month travelling the US at some point before I start working full-time!
I know many, many other people (employed, unemployed, student, retired) living the same way and splashing out on travel.
FWIW, pre-pandemic, as a family, I don't remember ever travelling as much. I think we were more likely to do road trips within the UK. And, at that point, we benefited from being in the EU so countries like Spain, Italy, Portugal were very easily accessible. Definitely didn't make the most of it. |
