One of Wall Street's biggest winners of the day is Carnival, a marine shipping company whose shares have climbed 4.3% to a price of $21.81 -- 9.46% below its average analyst target price of $24.09.
The average analyst rating for the stock is buy. CCL outperformed the S&P 500 index by 4.0% during today's morning session, and by 44.0% over the last year with a return of 83.4%.
Carnival Corporation & plc engages in the provision of leisure travel services in North America, Australia, Europe, Asia, and internationally. 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's trailing 12 month P/E ratio is 18.6, based on its trailing EPS of $1.17. The company has a forward P/E ratio of 12.7 according to its forward EPS of $1.72 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.6, and the average for the S&P 500 is 29.3.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Carnival's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.05. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing CCL's growth potential .
Carnival's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 4,281,000 | 3,284,000 | 997,000 | 115.08 |
| 2022 | -1,670,000 | 4,940,000 | -6,610,000 | 14.33 |
| 2021 | -4,109,000 | 3,607,000 | -7,716,000 | 22.23 |
| 2020 | -6,301,000 | 3,620,000 | -9,921,000 | -21667.39 |
| 2019 | 5,475,000 | 5,429,000 | 46,000 | -97.44 |
| 2018 | 5,549,000 | 3,749,000 | 1,800,000 |
- Average free cash flow: $-3567333333.3
- Average free cash flown growth rate: -11.1 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
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 3.19 as of the third quarter of 2024.
With a Very low P/E ratio, an average P/B ratio, and negative cash flows with a downwards trend, we can conclude that Carnival is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and a negative PEG ratio.
