Is it Time to Buy Carnival Stock?

Long-term investing is the key to sustainable returns in the stock market, but sometimes it can backfire spectacularly. For example, if you purchased $1,000 of Carnival Corp. (NYSE: CCL) (NYSE: CUK) stock 10 years ago, you would have just over $500 today -- a loss of around 50%. That means more than a decade of growth and billions in stock buybacks essentially evaporated during the coronavirus pandemic.

The good news is that Carnival's business is finally getting back on track. And the company aims to regain the value it lost over the previous years. Let's dig deeper into the pros and cons of the stock to decide if investors should give the iconic cruise company a second chance.

The business is recovering sharply

While there is a lot of talk about the ostensibly terrible U.S. economy (analysts at UBS put the near-term likelihood of recession at 93%), the doom and gloom isn't showing up in Carnival's results. On the contrary, business is booming. Third-quarter revenue rose 3.3% to $8.15 billion based on modest increases in tickets and onboard sales, which typically refers to the purchase of food and drinks during cruises.

Management plans to drive continued growth with new experiences, such as Celebration Key, a private island development in the Bahamas with beaches, dining, and water park attractions. This development is part of a gradual shift in the company's business model, where it is seeking to drive more onboard (or on-island spending) by offering its guests controlled environments where they can continue to spend money outside the ship.

The company expects 3 million guests to visit Celebration Key in 2026 (this would be around 25% of its total passenger volume, based on 2024 numbers). And it plans to open a similar development called RelaxAway, Half Moon Cay in mid-2026. This is another private island in the Bahamas that aims to offer a more refined and tranquil guest experience.

Can Carnival handle its debts?

While it is easy to get excited about new developments, bookings, and ticket sales, these factors don't mean much if they don't translate to profits. The good news is that Carnival is also making impressive progress in this regard, with operating income rising by a modest 4.2% year over year to $2.27 billion in the third quarter.

Carnival's profitability is crucial, considering the capital-intensive nature of its industry. It must constantly maintain its vessels and buy new ones when they become outdated, while also pouring capital into its new private island developments. The company has also accumulated a considerable amount of debt from the COVID-19 pandemic, which is generating interest expense and will eventually have to be paid off.

Image source: Getty Images.

As of the third quarter, long-term debt stood at $25 billion, compared to $1.76 billion in cash. The debt generated $317 million in third-quarter interest expense, but this looks very manageable if Carnival can maintain or improve its current levels of profitability. Management has consistently refinanced its debt to spread out maturities over a longer period. Falling interest rates have made it easier to replace higher-interest notes.

I'm still not excited about Carnival

By all means, Carnival is a solid company. Its business has recovered from the pandemic, debt looks manageable, and pivoting to new private island experiences could help it grow onboard revenue while expanding its customer base.

But a good company isn't always a good long-term investment. And there are reasons why it's hard to get excited about this stock, despite its improving fundamentals.

One such example, Carnival is quite expensive. While the company's market cap of $34 billion might look cheap (that corresponds to a forward price-to-earnings multiple of just 11), this metric doesn't account for the company's high debt levels, which give it an enterprise value of $60 billion. That's a high price to pay for a recession-vulnerable business growing at low single digits.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.