What a time it’s been for Carnival. In the past six months alone, the company’s stock price has increased by a massive 46.2%, reaching $28.60 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why Is Carnival Not Exciting?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why CCL doesn't excite us and a stock we'd rather own.
1. Weak Growth in Passenger Cruise Days Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Carnival, our preferred volume metric is passenger cruise days). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Carnival’s passenger cruise days came in at 27.5 million in the latest quarter, and over the last two years, averaged 9.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Carnival’s revenue to rise by 5.1%, a deceleration versus its 20.5% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Carnival’s five-year average ROIC was negative 2.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.
Final Judgment
Carnival isn’t a terrible business, but it doesn’t pass our quality test. Following the recent rally, the stock trades at 12.1× forward P/E (or $28.60 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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