One of Wall Street's biggest winners of the day is Carnival, a marine shipping company whose shares have climbed 3.7% to a price of $16.25 -- 5.44% below its average analyst target price of $17.18.
The average analyst rating for the stock is buy. CCL outperformed the S&P 500 index by 3.0% during today's afternoon session, and by 54.0% over the last year with a return of 62.0%.
Carnival Corporation & plc engages in the provision of leisure travel services. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
Carnival does not release its trailing 12 month P/E ratio since its earnings per share of $-2.72 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for CCL of -6.0. Based on the company's positive earnings guidance of $0.95, the stock has a forward P/E ratio of 17.1.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Carnival's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.8. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing CCL's growth potential .
To better understand the strength of Carnival's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-27 | 12,169,000 | -4,790,000 | -32 | 90.27 |
| 2022-01-27 | 1,908,000 | -4,118,000 | -329 | -282.56 |
| 2021-01-26 | 5,594,000 | -4,119,000 | -86 | -637.5 |
| 2020-03-31 | 20,825,000 | -7,807,000 | 16 | -11.11 |
| 2019-01-28 | 18,880,000 | -7,438,000 | 18 | 5.88 |
| 2018-01-29 | 17,510,000 | -4,111,000 | 17 |
- Average operating margins: -66.0 %
- Average operating margins growth rate: -14.3 %
- Coefficient of variability (lower numbers indicate less volatility): 204.8 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Carnival's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ 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 | 22.13 |
| 2019-01-28 | 5,549,000 | -3,360,000 | 8,909,000 | 7.78 |
| 2018-01-29 | 5,322,000 | -2,944,000 | 8,266,000 |
- Average free cash flow: $4.57 Billion
- Average free cash flown growth rate: 0.0 %
- Coefficient of variability (the lower the better): 7582361482.1 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, CCL is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing 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 liquidation value of the company, as if it sold all of its assets and paid off all debts.
Carnival's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
Carnival is by most measures overvalued because it has a negative P/E ratio, an average P/B ratio, and irregular cash flows with a flat trend. The stock has poor growth indicators because it has a a negative PEG ratio and consistently negative margins with a negative growth trend. We hope you enjoyed this overview of CCL's fundamentals.
