Standing out among the Street's worst performers today is Carnival, a marine shipping company whose shares slumped -11.5% to a price of $13.98, 8.58% above its average analyst target price of $12.88.
The average analyst rating for the stock is buy. CCL underperformed the S&P 500 index by -11.0% during today's afternoon session, but outpaced it by 38.0% over the last year with a return of 49.8%.
Carnival Corporation & plc engages in the provision of leisure travel services. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Carnival does not release its trailing 12 month P/E ratio since its earnings per share of $-4.06 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for CCL of -3.4. Based on the company's positive earnings guidance of $0.84, the stock has a forward P/E ratio of 16.6. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Carnival's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.39. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Carnival's operating margins have averaged -125.3% and displayed a mean growth rate of -20.0%. These numbers show that the company may not be on the best track.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Carnival's free cash flow, which was $-6610000000.0 as of its most recent annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In CCL's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-6050250000.0 and they've been growing at an average rate of -16.0%.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Carnival's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.86, but is still below the average P/B ratio of the Consumer Discretionary sector, which stood at 3.12 as of the first quarter of 2023.
Carnival is likely overvalued at today's prices because it has a negative P/E ratio, an average P/B ratio, and negative and highly variable cash flows with a downwards trend. The stock has poor growth indicators because of its consistently negative margins with a negative growth trend, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into CCL's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
