Shares of Carnival (CCL) Are on Sale - But Consider the Risk.

Carnival was one of the market's biggest losers today, losing 4.5% of its value and underperforming both the S&P500 and Dow Industrial composite indices by 0.0%. The large-cap Consumer Discretionary company ended the day at $17.99, but is still well above its 52 week low of $6.11 and nearing its average target price of $17.18. Over the last 12 months, Carnival is up 92.0%, and has outperformed the S&P 500 by 79.0%. The stock has an average analyst rating of buy.

Carnival does not release its trailing 12 month price to earnings (P/E) ratio because its earnings per share of $-2.7 are negative over the last year. Since P/E ratios are the stock's price divided by its earnings per share, a negative EPS number will result in a negative P/E ratio. This doesn't tell us much besides the fact that the company is not currently profitable.

Based on Carnival's positive earnings guidance of $0.95, its stock has a forward P/E ratio of 18.9. Earnings refer to the net income of the company from its sales operations, and the P/E ratio tells us how much investors are willing to pay for each dollar of these earnings. In comparison, the Consumer Discretionary sector has historically had an average P/E ratio of 22.33.

Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it sold all its tangible assets and paid off all debts today. Carnival's P/B ratio of 3.88 indicates that the market may be overvaluing the company when compared to the average P/B ratio of the Consumer Discretionary sector, which is 3.12.

To understand Carnival's business, and therefore its attractiveness as a potential investment, we must analyze its margins in two steps. First, we look at its gross margins, which take into account only the direct cost of providing the product or service to the customer. This enables us to determine whether the company benefits from an advantageous market position:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023-01-27 12,169,000 -11,317,000 7 106.2
2022-01-27 1,908,000 -4,063,000 -112.95 -823.55
2021-01-26 5,594,000 -6,278,000 -12.23 -122.92
2020-03-31 20,825,000 -9,715,000 53.35 n/a
  • Average gross margins: -16.2 %
  • Average gross margins growth rate: -39.8 %
  • Coefficient of variability (lower numbers indicate more stability): 432.7 %

Next, we consider the Carnival's operating margins, which take into account overhead. This tells us whether the company's business model is fundamentally profitable or not:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-01-27 12,169,000 -4,790,000 -32.36 90.16
2022-01-27 1,908,000 -4,118,000 -328.77 -282.91
2021-01-26 5,594,000 -4,119,000 -85.86 -641.36
2020-03-31 20,825,000 -7,807,000 15.86 n/a
  • Average operating margins: -107.8 %
  • Average operating margins growth rate: -20.4 %
  • Coefficient of variability (lower numbers indicate more stability): 142.0 %

From the above, we can see that Carnival is not a profitable business. While unprofitable businesses may provide shareholders with attractive short term returns, more conservative investors will prefer to wait until the business can reach a profit before committing.

To get a better idea of Carnival's finances, we will now look at its cash flows. Often touted as a general yardstick for a company's financial health, cash flows represent the sum of inflows and outflows of cash from all sources, including capital expenditures:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2023-01-27 -1,669,000 -4,870,000 3,201,000 475.26
2022-01-27 -4,109,000 -3,256,000 -853,000 71.69
2021-01-26 -6,299,000 -3,286,000 -3,013,000 -127.69
2020-03-31 5,478,000 -5,403,000 10,881,000 n/a
  • Average free cash flow: $3.2 Billion
  • Average free cash flow growth rate: -26.4 %
  • Coefficient of variability (lower numbers indicating more stability): 239.6%

Free cash flow represents the money that Carnival can use to either reinvest in the business or to reward its investors in the form of a dividend. Despite the company's recent cash flows being in the green, investors do not currently receive a dividend.

Carnival does not meet the traditional definition of a fairly valued company. Unless the company has strong qualitative factors in its favor, most value investors will probably prefer to avoid this stock.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.