Carnival Corporation & PLC

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

{: .new } Carnival Corporation & PLC is a global cruise company operating a large portfolio of well known brands such as Carnival, Princess, Holland America, Costa, Seabourn, and others.

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 is a major player in the cruise industry, with a portfolio that encompasses a wide range of cruise lines catering to diverse customer demographics and travel preferences. The company’s operations are primarily categorized by geographic regions such as North America and Australia (NAA), Europe, and China. The cruise industry is known for its cyclical nature, tied to the economic outlook, and is also influenced by consumer trends and preferences. The company has been working towards lowering its costs by increasing efficiency. The business also relies on its brand reputation, capacity, and pricing strategy to remain competitive.

  • Revenue Distribution:
    • Passenger ticket revenue is the largest driver of revenue for Carnival.
    • Onboard and other revenue sources include sales of food, beverages, merchandise, casinos, and shore excursions. The mix of revenue from ticket sales and onboard sources is determined by multiple factors, such as cruise itineraries, the cruise lines, their pricing policies, and the demographic served. This mixture is essential to understand the economic dynamics of cruise companies.
    • The revenue for the three months ending May 2024 shows strong revenue from the NAA and Europe segments, though most revenues are still for North America, 3.5 vs 3.1 billion respectively.
  • Industry Trends:
    • The Cruise industry has experienced strong growth in the past due to an increase in travel demand. It has also been plagued by major external shocks such as the pandemic that created heavy losses to the industry. Since the beginning of 2023, the industry has seen a strong resurgence with the demand of passengers.
    • Key trends include the growing popularity of multi-generational trips, the demand for unique and immersive travel experiences, and the increasing focus on sustainability and health and safety protocols.
    • Geopolitical conditions and macro events can easily reduce the profitability in the industry.
    • The long term growth in emerging markets is also an important driver of the business.
    • The cruise industry has seen increased consolidation in the last few years.
  • Margins:
    • Cruise lines are known to have high fixed costs due to ships, crew, and operating expenses, thus achieving high occupancy and good pricing power is critical for profitability.
    • The nature of the business dictates that much effort has to be spent in lowering costs and increasing prices to gain as much as possible.
    • Cruise businesses also have high operating leverage, and small changes in revenue can lead to big changes in operating income.
    • Cost efficiencies are also important, since most cruises follow similar routes and use similar infrastructure, this forces cruise companies to compete for prices.
    • In the last earning period, the operating margin was about 11% after almost 3 years of being negative.
  • Competitive Landscape:
    • The cruise industry is dominated by a few large players, but smaller and more differentiated cruise lines can be successful by focusing on niche markets or specific customer preferences.

  • Competition in the industry tends to focus on pricing power, the amount of cruises provided, routes, and onboard experiences. * The major players, such as Carnival, are able to get a better price for resources, which may translate to better profit margins. * The competition between the major players has heated up quite significantly and smaller players have had to compete at the bottom end of the price range, leading to a higher range of pricing for the entire industry.

  • What Makes CUK Different:
    • Carnival has the largest market share by revenue in the industry.
    • A diverse portfolio allows for market penetration in diverse demographics.
    • It has a strong brand loyalty which can increase retention and profitability.

Financial Analysis

  • Revenue:
    • Carnival’s revenues are primarily driven by passenger ticket sales, which are greatly dependent on capacity utilization and the company’s pricing strategy.
    • In recent reports, Carnival reported significant increases in revenue to near pre-pandemic levels, however they are still down 10% compared to 2019 levels.
    • The revenues for cruises have started recovering, however the company expects to reach pre-pandemic levels only by 2024.
    • The revenues have seen a great uplift, almost all attributable to the increased passenger fares and increased on board spending, but the revenues are also aided by increasing capacity.
  • Operating Income:
    • Recent earning shows that the company has a positive income after about 3 years of negative profits. However, it also showed that interest expenses account for almost half of their operating income, showing how highly leveraged the business is.
    • Most of the operating expenses, such as personnel, ship expenses, fuel costs, and other operating costs are highly variable and can be affected by the external factors.
  • Profitability:
    • Carnival is seeing positive profits as their operating margins have increased as cruise demand bounces back.
    • However the profitability is dependent on prices and occupancy, and is very sensitive to external shocks such as geopolitical events, the market and consumer sentiments, and any new regulations or restrictions on the business.
  • Cash Flow:
    • Carnival’s free cash flow was negative, though a higher revenue may start driving it into the positive.
    • The company has high capex costs for maintaining the fleet, so it will require a stable income to maintain it.
    • The cash flow will also be affected by their debt burden.
  • Balance Sheet:
    • The company had $6.9 billion in cash and equivalents at the end of May 2024, a good figure, and a very important buffer for a capital-intensive industry with variable income.
    • The company has a debt of over $29 billion, which means it is highly leveraged. This high level of debt is primarily from the major losses the company suffered during the pandemic.
    • The company has shown a trend of improving debt ratios, however there is still a very high amount of debt to repay. The cash balance shows that the company has been able to generate enough cash to not increase debt, but only time will tell if it can manage to both maintain its fleet and lower debt.
    • The equity for CUK has declined over the past decade, and is still significantly below its peak in 2015.

Moat Rating: 2 / 5

  • Justification: While Carnival benefits from its established brand and scale, which creates switching costs from the consumer perception, they don’t offer defensible competitive advantages against major competitors.
  • Intangible assets: CUK has recognizable cruise line brands and a history of operation which creates a barrier, but their brands are not as strong as other recognizable brands and the industry has low brand loyalty.
  • Economies of scale: CUK does have economies of scale, as it is a very large company with significant investments in assets, which smaller competitors may be unable to produce.
  • Network effects: CUK does have a positive network effect in that the more people use it, the better service may become.
  • Customer switching costs: CUK does have customer lock in with its reward and loyalty system.

Risks to the Moat and Business Resilience

  • Economic Downturns: The cruise industry is cyclical and vulnerable to economic downturns, leading to reduced demand and lower prices, negatively impacting profitability.
  • Geopolitical Instability: Events such as wars, civil unrest, or political issues can affect the destinations offered by cruise companies, and therefore reduce the willingness to spend in such areas or the overall attractiveness of cruises as a safe and reliable vacation.
  • Pandemics and Health Crises: Events such as the COVID-19 pandemic have demonstrated that large and small crises can greatly affect the business, with cruise lines being particularly vulnerable to outbreaks and public concerns regarding their safety and cleanliness. This could lead to reduced occupancy.
  • Environmental Regulations: Regulations aimed at reducing pollution and promoting green initiatives can increase operational costs, impacting the bottom line. These changes are hard to implement for an asset heavy business with many older ships.
  • Fuel Price Volatility: The cost of fuel greatly affects their profitability due to its large role in the operating costs, these fluctuations could put strains on profitability.
  • Technological Disruption: The industry may face technology-driven disruptions, such as changes in consumer behavior and the introduction of alternative forms of travel and entertainment, which can threaten its viability.
  • Debt burden: High debt limits companies ability to maneuver during crises and makes them more susceptible to bankruptcy in times of lower demand.
  • Government Policies and Regulations: Government policies, regulations, and taxes can increase costs and add to the uncertainties.

Understandability: 3 / 5

  • Justification: The cruise business model is relatively straightforward, involving cruise operations, ticket sales, and onboard revenues. However, analyzing a cruise line’s financial performance can be complicated due to the variability in revenues, expenses, and seasonality of the business and the complex reporting.

Balance Sheet Health: 2 / 5 

*    **Justification:** CUK has a high debt load and low equity which makes it a riskier business. Though cash position is strong, it needs to pay off its debts in the coming years.
* Debt ratios have improved a little recently, but it is still very highly leveraged.