Why Is Carnival Stock Up 34% Since May? | The Motley Fool (2024)

It's taken a few years, butCarnival (CCL 2.67%) (CUK 3.10%) shareholders are finally starting to find their sea legs. Shares of the world's largest cruise line operator have been sailing smoothly in recent weeks, up a seaworthy 34% since the start of May.

Long-term Carnival investors will take a little more convincing that the upticks will stick. The stock is still 83% below the all-time high it hit more than five years ago. Go back 10 or even 20 years, and those stakes are currently underwater, despite the cruise market being much larger now than it was at those starting lines.

Dilution hasn't helped. Carnival's share count has increased by roughly 75% since the pandemic, and its long-term debt has more than tripled in that time. The cruising industry had to sacrifice a lot to stay afloat when fleets weren't allowed to return to business as usual for years after the COVID-19 crisis shut down operations.

Is the latest comeback for real? The skies are clear, and the water looks less choppy. Let's see how safe it may be to get back into the water when it comes to Carnival stock.

A rising tide lifts all ships

The timing of the rally is convenient. Carnival reports its fiscal second-quarter results later this month. It's also heading into the telltale summer travel season.

Analysts are warming up to the turnaround. James Hardiman at Citi upgraded the shares from neutral to buy two weeks ago, boosting his price target by 40% to $14. With cruise pricing and consumer interest starting to firm up, the path is now there for Carnival to start tackling its bloated share count and problematic long-term debt situation.

Even the worrywarts are starting to temper their pessimism. Truist analyst Patrick Scholes is sticking to his sell rating, but last week, he bumped his price target on the stock from $10 to $11. Scholes sees improvement in future bookings and pricing trends after discussions with travel agency executives. Bookings and pricing trends remain unchanged for 2023 sailings from where they were eight weeks ago, but there is some welcome strengthening for 2024 and 2025 itineraries.

The industry is finally back. Three months ago, Carnival posted record booking volumes for all future sailings during its fiscal first quarter. Wall Street pros see revenue nearly doubling for the fiscal quarter ending in May that it will be discussing later this month -- a testament as much about its recovery as it is to how skittish folks were to hop on a cruise ship in the springtime of last year.

Carnival is expected to post record revenue this fiscal year. It's still not close in terms of profitability, but the losses are narrowing. More importantly, Carnival isn't burning analysts anymore. After a long run of larger-than-expected quarterly deficits, Carnival has come through with back-to-back quarters of bottom-line beats.

Data source: Yahoo! Finance. EPS = earnings per share.

After Carnival's 14-straight crushing quarterly losses, analysts see a return to positive earnings this summer. After that, the largest of the cruise line stocks should pick up speed. If you're willing to go out on a limb -- all the way to fiscal 2027 when the Wall Street profit target is north of $2.50 -- you can pick up the shares now at less than 5x those earnings.

A lot can and will happen between now and then. Recessions, rising geopolitical tensions, and another pandemic could bump this ship off course. However, things can also be even better than market expectations. Theme park operators, hoteliers, and, to a certain extent, airlines have learned from the COVID-19 lull to improve their operations.

Cruise lines haven't had a chance to prove what they have learned until now and had a much longer lull to map out a comeback plan. You can teach an old cruise line some new tricks, and the current Carnival rally seems warranted and legit.