Why Carnival Stock Soared 19% in October

Shares of Carnival (NYSE: CCL)(NYSE: CUK) stock jumped 19% in October, according to data from S&P Global Market Intelligence. It delivered an outstanding earnings report going into the month, and it's also benefiting from improved investor sentiment based on lower interest rates.

Travelers love cruises

Carnival's revenue touched zero during the worst part of the pandemic, but that's not because it fell out of favor with fans. As soon as it relaunched, people started signing up, and they haven't stopped. The torrent of demand demonstrates how much of a market there is for cruises, and Carnival's spot as the leader in the industry is bringing long-lasting benefits.

Even with the return of high demand, some issues have remained, such as getting back to profit and getting rid of the debt it took on to stay running when it wasn't making money. But even those measures are improving enough to comfort investors.

Earnings for the 2024 fiscal third quarter, ended Aug. 31, were better than expected across the board, highlighting Carnival's strength and leading to confidence in the long-term story. Investors are assuming that the record demand will eventually wane, but so far, it's proving to be more enduring than the market was giving it credit for. There were records, again, for multiple metrics: revenue of $7.9 billion, $1 billion more than last year; operating income of $2.2 billion, more than $500 million more than last year; record ticket pricing and record bookings, leading to the outperformance in sales and improvements in profitability.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was a record $2.8 billion, 25% more than last year, and net income was $1.7 billion, $662 million more than last year.

The acute impact of low interest rates

The economy as a whole, and some specific industries, are benefiting from lower interest rates. The way it affects Carnival is in the effects on its high debt.

Carnival has already sliced several billion dollars off its peak debt, but as of the end of the third quarter, it still has more than $30 billion. That's about $20 billion more than it had before the pandemic.

It has been able to pay off its highest-interest loans through strong cash-flow generation, but it's still been a concern that a leveling off in demand could lead to sagging cash flow and challenges in paying off the debt. However, as demand stays strong and interest rates come down, Carnival should have an easier time paying it off to get back to historical levels. It's still a few years away from that, but investors now see the potential.

There may be some lumpiness on the journey, but Carnival has a long track record of leading the industry and beating the market, and it could be an excellent stock to hold in your portfolio.

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