Over the past six months, Carnival’s stock price fell to $27.70. Shareholders have lost 12.8% of their capital, which is disappointing considering the S&P 500 has climbed by 13%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Carnival, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Carnival Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Carnival. Here are three reasons why CCL doesn’t excite us, plus one 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 25.7 million in the latest quarter, and over the last two years, averaged 1.2% 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. Free Cash Flow Projections Disappoint
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting Carnival’s free cash flow margin of 11.7% for the last 12 months to remain the same.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Carnival historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.4%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Carnival, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 11.9× forward P/E (or $27.70 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. Let us point you toward the most entrenched endpoint security platform on the market.
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