Carnival Corporation

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 2/5

Carnival Corporation is a global cruise company with a portfolio of well known brands, offering a variety of cruise vacations across different geographical areas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Carnival Corporation operates as one of the world’s largest cruise companies, offering a wide array of vacation experiences across North America, Europe, Australia, and Asia. The company’s operations are divided into several segments, each with its own unique brand. The company primarily generates revenue through the sale of cruise tickets and onboard activities. Here’s a breakdown:

Geographical Reach: Operates globally, with a strong presence in key cruising markets. Europe is a key market for the company.
Brand Portfolio: A wide variety of brands catering to different customer preferences, including Carnival Cruise Line, Princess Cruises, Holland America Line, and Cunard among others.
Customer Demographics: Caters to a broad demographic, from value-oriented cruisers to luxury travelers.
Revenue Streams: Primarily from passenger tickets, with a significant portion also from onboard spending (e.g., food, beverage, excursions, casino).
The Industry: The cruise industry has seen long-term growth. It’s heavily influenced by macro-economic factors, as cruises are typically a discretionary purchase. Competition is intense, but brand loyalty is a key factor.

Moat Analysis:

Rating: 1 / 5 Justification:

Lack of Switching Costs: The cruise market tends to be a one time purchase for the consumer or, at best, very infrequent recurring purchase. Most customers are willing to try other companies for different prices.
Limited Brand Differentiation: While Carnival has multiple brands, these are more similar than different. Furthermore, while there may be some brand loyalty, it is not very difficult for the competition to imitate some of their more unique characteristics.
Low Barriers to Entry: Despite the large initial investment, competition is getting stronger. Companies can charter boats rather than buying them, making it easier to offer competing products.
No Network Effects: There is very little network effect to the business, since it benefits the consumer very little if more people are using the business.
No Cost Advantage: The company is not a low cost leader, there is a very small difference in cost of operations between all companies in this market. In fact, scale might be a disadvantage in this market as more operations entail higher overhead.

Therefore, I assess that Carnival does not have a sustainable competitive advantage or an “economic moat”.

Legitimate Risks:

Risks to the Moat and Business:

Economic Downturn: The cruise industry is highly sensitive to economic downturns, which cause a decline in consumer spending. This can lead to lower bookings and reduced pricing power.
Geopolitical Unrest and Pandemics: The industry was severely affected by COVID-19, and future events like the war in Ukraine also have a big influence. Geopolitical risks and health crises can greatly reduce revenue and also lead to higher expenses in the medium to long term.
High Fuel Costs: The price of fuel is volatile. If there is an unexpected rise in fuel prices, the company will be forced to either make a substantial increase in prices, lowering sales, or bear the costs and lowering margins.
Competitive Pressures: Intense competition can erode margins and market share. Smaller cruise operators with less overhead have the potential to compete and take away customers.
Operational Risks: The company must ensure the smooth operations of cruises, any issues that may cause dissatisfaction can have a negative impact on reputation and future earnings. There are many other logistical issues that the company has to control.
Dependence on Financing: The company’s success depends on access to credit markets, and a major increase in the cost of debt can impact the bottom line.
Consumer Preferences: The consumer’s preferences may change, and the company needs to constantly adapt to new trends or desires. For example, a shift away from big cruises in favor of smaller tours may impact performance.
Environmental Regulations: More strict regulations for the shipping and cruise industry may increase the costs of operations in the medium to long term, also affecting revenue.

Business Resilience:

High Fixed Costs: The nature of the industry with a high fixed cost structure makes it vulnerable to swings in demand. This means that periods of decreased demand would greatly reduce profits.
Brand Recognition: The company’s multiple brands are very well known across the world, and this is one of its biggest strengths.
Ability to Adapt to Changes: The company has proven capable of adapting to the conditions and bouncing back. For example, it was able to change its business model in accordance with the COVID-19 related travel restrictions.

Financial Analysis

Revenues: Since cruises were a major restriction during the years of the pandemic, it’s important to start with the 2019 numbers. In 2019 they generated 20.8 billion in revenue, and with cruise travel picking up it is still yet to recover from that. Revenue has steadily increased from $4.8 billion in 2021 to 12.2 billion in 2022, and 14.7 billion in 2023.
Gross Margins: The gross margin is very high, going from 68.5% in 2019 to 71.3% in 2022. However, that can vary depending on occupancy as this margin also takes into account expenses like staffing, food, logistics, and fuel.
Operating Margins: The operating margins are not as impressive due to other operating costs. The operating margin has greatly improved from -95% in 2021 to 5.5% in 2022 and to 10.5% in 2023. This greatly affects the net profit. The company went from a negative net income of -8 billion in 2021, to -2.6 billion in 2022 and a positive income of 1.2 billion in 2023.
Debt: The company has around $34 billion in debt and lease obligations. It is also very important to note that the average interest rates for the debt has been rising (5.6% in 2019, to 6.7% in 2022, and 8.5% in 2023). It is still unclear how this trend will be managed.

Understandability:

Rating: 2 / 5 Justification:

Although the nature of the business is easy to understand- the company provides cruises and earns profit based on it’s pricing and operating costs- there are many things under the hood that can be difficult for the average person to grasp.
The company has many different brands that can cater to different crowds and geographic locations.
Furthermore, many of the variables are dependant on macro-economic and geopolitical conditions that make it harder for accurate projections. Finally, there are many accounting variables that can influence the bottom line and that makes this very complex to analyse.

Balance Sheet Health

Rating: 2 / 5 Justification:

The company’s balance sheet is still quite precarious. The total liabilities of the company is around 51 billion, while total assets is 45 billion, so the company’s equity is a negative 6 billion, and thus they are technically bankrupt.
The company has around $34 billion in debt.
Cash and cash equivalents have risen from 7.2 billion in 2021, to 8.8 billion in 2022, but declined to 5.6 billion in 2023.
There are several risks that can put the company in a very tough position in the future (mentioned above).
The long term effects of the pandemic are not fully clear yet.
However, the company did manage to achieve a positive net income of $1.2 billion in 2023, which shows some signs of improvement.

Recent Concerns and Management’s Actions

The primary concern has been the recovery from the COVID-19 pandemic and how the change in consumer preferences will affect their future operations. The management has pointed to recent trends such as greater occupancy and higher onboard revenue per passenger, they have also stated that they are being more selective with which cruises they offer, targeting higher yield cruise itineraries.
Another main concern is the debt, the company’s management has stated that they expect the debt to be paid down over the next couple of years, but the interest rates could have an impact on their financial flexibility if they continue to stay high.

All in all, the company is still quite risky and speculative. Although it has greatly improved in performance since the pandemic, they are yet to prove that their business model is strong enough to resist the turbulent economic conditions.