Carnival Stock Plunges 4% - Recovery Ahead or More Rough Seas?

Carnival Corporation shares took a brutal 4% hit on Monday, leaving investors scrambling for life jackets.

The Bleeding Continues

Monday's selloff adds to mounting pressure on cruise operators as consumer spending patterns shift. That 4% drop wasn't just a minor correction—it was a warning shot across the bow.

Recovery Prospects

Industry analysts remain divided. Some see this as a buying opportunity while others warn of choppy waters ahead. The cruise giant's ability to navigate post-pandemic realities will determine whether this bounce becomes reality or just another dead cat bounce—because nothing says 'stable investment' like a company that literally floats on debt-fueled luxury.

One thing's certain: Carnival needs more than just smooth sailing to win back Wall Street's confidence after that 4% shellacking.

Diving into the deep end

Revenue hit a new record of $8.2 billion during the seasonally potent fiscal third quarter for Carnival. It was just a 3% increase over last year's previous record-setting showing, but Carnival did this on slightly lower capacity this time around. A 4.6% jump in net yields -- another new high-water mark for Carnival -- helped push the top line higher.

Net income of $1.9 billion (or $2 billion on an adjusted basis) is also an all-time high for Carnival. Passengers are willing to pay up for sailings and on-board activities, more than enough to offset the rising costs to provide them. Its adjusted profit of $1.43 a share landed 9% ahead of expectations, the latest in a long string of positive surprises on the bottom line.

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

Carnival wrapped up its quarter by raising its guidance for the full fiscal year that ends in November. It did so for all the metrics that it updates quarterly, but let's zoom in on adjusted earnings. Carnival was initially targeting an adjusted profit per share of $1.70 back in December, when it initiated its fiscal 2025 forecast. That per-share adjusted income goal post has inched higher every three months, going to $1.83, $1.97, and now $2.14.

It's a strong report, but the company that carves out a living sailing blue oceans ended Monday in red. It's time to sniff out potential culprits, but -- spoiler alert for anyone looking to invest in Carnival -- it sure seems like a bargain after an unfair sell-off.

Image source: Getty Images.

Fishing for clues

The remarkable recovery for the cruise line industry doesn't get enough credit. No other slice of the travel pie had to suffer through government-mandated sailing stoppages for more than a year in light of the COVID-19 crisis. Carnival and its peers had to take on a lot of debt or issue new stock to stay afloat in more ways than one during the long revenue-free phase of the recovery process.

The latest insult hurled at Carnival is the market selling off following another blowout report, but let's dust for fingerprints.

It's easy to start at the degree of the beat. Check out Carnival's adjusted profit, coming as a 9% positive surprise in the table shown earlier. It is the first time in more than two years that the cruising bellwether offers just a single-digit percentage beat. It is a sign of weakening, but it WOULD a silly thing to penalize.

The year-over-year revenue growth of 3% should also get some consideration. It dings Carnival as a growth stock. It's also the cruise line operator's weakest increase on the top line in more than four years, taking you all the way back to when it was essentially not taking on passengers. However, three months, Carnival was bracing investors to expect even slower growth.

Demand isn't an issue. Booking trends have improved since May. Carnival closed out the quarter with deposits for future sailings that have never been this high at this time of the year. It already has half of next year's sailing capacity booked. The two major analysts that have changed their profit targets since the report have gone higher, not lower.

One knock is that Carnival also announced on Monday that it's redeeming all of its outstanding convertible notes. It's a dilutive MOVE in spirit, but what did investors think would happen to convertible securities for an appreciating stock? Carnival has routinely redeemed debt it issues in more desperate times to be bankrolled by either its newfound wealth or more attractive credit terms.

The last and most logical knock is that Carnival has had a big run ahead of this week's financial reveal. The shares have risen nearly 60% over the past year, including this early week's retreat. This doesn't take away from the bargain that Carnival stock could be as its business perpetually improves.

Carnival is trading for less than 14 times this year's updated guidance. The multiple gets higher if you sub out its market cap for enterprise value, but the same can be said about most low-priced stocks that happen to have debt-heavy balance sheets.

Carnival had a strong quarter. Don't let the stock chart action convince you otherwise.