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Stock Analyst Update

Appetite for Travel Supports Strong Outlook at Carnival

We think the no-moat cruise company is set up for record revenue in 2023.

We don’t plan any material change to our $25 (GBX 1,890) fair value estimate for no-moat Carnival (CCL) after incorporating second-quarter results into our model and view shares as undervalued even after a roughly 10% post-print pop. While quarterly revenue of $2.4 billion and an EPS loss of $1.61 were a bit lower than our projections, the firm’s outlook for the remainder of the year remained positive (on trend with our outlook). Sales were split about equally between ticket and onboard, with bundled packaging remaining popular, indicating the willingness to partake in offerings while sailing. On the cost side, fuel spend weighed on expenses, up nearly 30% over the same period in 2019, while service costs on its $35 billion in debt continue to run at $1.6 billion annually.

Although 2022′s second-half booked position and pricing is lower relative to 2019 (hindered by the close in booking curve of newly deployed ships), 2023 is shaping up nicely, with cumulative advanced bookings at the high end of the historical range at higher prices. Moreover, the appetite for cruising remains on a positive trajectory, with total customer deposits lifted by $1.4 billion sequentially, boosted by the Carnival brand’s busiest booking week in history in late March. With occupancy continuing to rise over the remainder of 2022 (the Carnival brand is expecting 110% occupancy during the third quarter), we still think 2023 is set up for record revenue ($22 billion estimate) and EBITDA ($5.3 billion forecast) generation. Moreover, the shift to higher fleet financial performance after the divestiture of 23 ships (since 2019) will not only help support better pricing but should result in controlled costs. As such, we expect 2023 pricing and costs to be only slightly worse than in 2019 on a per diem basis. Beyond 2023, we think Carnival can capture low-single-digit yield and cost growth as inflation, commodity costs, and the economic environment normalize.