Down 11%, Is Carnival Stock a Buy?

Sometimes, economic uncertainty can create opportunities in the stock market. With shares down 11% since the start of the year, Carnival Corporation (NYSE: CCL) stock is probably on the radar of deal-hungry investors. The cruise ship operator's focus on consumer experiences could shield it from tariff-related effects on physical goods.

But can it overcome its debt-laden balance sheet? Let's dig deeper to find out.

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How significant is the tariff risk for Carnival?

U.S. President Donald Trump's April tariff announcement sparked a sharp decline in Carnival and other cruise stocks. This reaction is understandable. As the Trump administration has often pointed out, the U.S. has fallen behind in commercial shipbuilding, making cruise companies hugely reliant on foreign supply chains. Carnival's multi-million-dollar vessels are typically built with the help of European partners like Italy's Fincantieri and Germany's Meyer Werft in shipyards across Europe and Asia.

While many of Trump's tariffs are currently paused or under negotiation, potential levies of 10% and higher could dramatically increase Carnival's capital expenditure budget, which is expected to total $1.1 billion for new-build ships and $2.5 billion for non-new-build ships this year.

The good news is that management can mitigate this challenge by focusing on shifting ships within its brand portfolio to the locations where they are needed. It can also acquire pre-owned ships from American companies that will likely be exempt from the tariffs. More importantly, however, Carnival's core business of operating cruises seems relatively insulated from tariff-related pressure.

Business is booming

Tariffs generally apply to physical products arriving at a nation's ports. Since Carnival mainly provides experiences, this won't significantly affect its business model. Onboard revenue should also be relatively safe because the Florida-based company sources food from a vast network of local suppliers, often located near its embarkation points.

Business is booming. First-quarter revenue jumped 7% year over year to $5.8 billion, driven by strength in both ticket sales and onboard revenue. Margins also remain strong, helping to contribute to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.2 billion. But when we look a little closer, there are still some challenges.

With $25.5 billion in long-term debt on its balance sheet, Carnival is incurring a whopping $377 million per quarter in interest expense on top of the sizable debt maturities it faces ($1.1 billion this year, and $2.7 billion in 2026). While companies can usually refinance high-interest debt, the current economic uncertainty keeps inflation expectations high and makes the Federal Reserve reluctant to lower interest rates.

Image source: Getty Images.

While Carnival's adjusted EBITDA looks good, it is adding back significant non-cash outflows like depreciation and amortization, which are essential to track considering the asset-heavy nature of its business. When all such outflows are factored in, the company generated a net loss of $78 million in the first quarter, which better reflects the value it's creating (or instead destroying) for its shareholders despite the top-line growth.

Carnival stock is not that cheap

With a forward price-to-earnings (P/E) multiple of just 12, Carnival stock may look cheap, especially compared to the S&P 500 average of 28. However, investors shouldn't overlook the $25 billion in long-term debt that will substantially drain the company's cash flow and earnings.

While Trump's trade policy will have a limited effect on Carnival's direct operations, it will probably make the Federal Reserve less likely to lower interest rates, which the company will need to refinance on favorable terms. Investors should look for better deals in the market.

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