Carnival Corp Reports Strong Financials
Carnival Corp. (CCL) has announced impressive EBITDA and net profit figures for the second quarter, which wrapped up on May 31. They’ve also raised their guidance for the year. Notably, their free cash flow has more than doubled, with a remarkable increase in the FCF margin. This indicates that CCL stocks might be undervalued by at least 34%, suggesting a price of around $34.62 per share.
As of Tuesday, June 24th, CCL stock was trading at $25.74, showing a significant gain of over 7% for that day. Given the robust FCF margins alongside analyst revenue forecasts, the potential value of CCL stocks appears promising.
I had hinted at these results in my previous article on May 11, indicating that CCL shares could be valued at approximately $28.28 each.
Based on the strong FCF margin, it’s reasonable to suggest that the current stock price doesn’t reflect the true value, which should be closer to $34.62 per share.
If we delve deeper, you can sift through the revenue reports rich with statistics and management guidance (which is now higher). But really, what stands out is the amount of free cash flow that Carnival generates.
This detail appears on page 11 of their report. It’s worth noting that Carnival doesn’t directly disclose its free cash flow, so I calculated it, as shown in the table below.
In the recently concluded quarter, Carnival generated over $1.54 billion in free cash flow, which represents more than 23.4% of their revenue. Over the six months ending May 31, the FCF margin stood at 15.3%.
This implies that future FCF margins could average around 19.35%, a figure we can use for future projections.
With high management revenue guidance and analysts’ forecasts, estimating the next twelve months (NTM) free cash flow seems feasible.
Analysts currently predict revenue of $26.1 billion for this year through November 2025 and $27.12 billion for next year. This indicates an NTM running rate of $26.61 billion, though predictions might shift upward after today’s results.
To take a conservative approach, let’s project around $27 billion in NTM sales. Applying the average margin of 19.35% could result in more than $5 billion in free cash flow.
Currently, Carnival’s market value is at $34.75 billion, priced at $25.74 per share. If the market expects to double the free cash flow of $1.859 billion over the next six months, that implies a forecast of $3.718 billion, which translates to a FCF yield of 10.69%.
If we take our $5 billion forecast into consideration, it suggests an NTM market capitalization of over $46.7 billion. This means the market value could potentially increase by 34.5%.
In essence, it appears that CCL stocks might indeed be worth at least 34.5% more than current prices.
Evidence shows that the shares are likely undervalued, and analysts generally seem to concur.
For instance, data from Yahoo! Finance indicates that 29 analysts have set an average target price of $28.55 per share, which is notably higher than the consensus of $27.55 I mentioned in my last article. Similarly, survey results show an increase to an average of $28.17 from $27.67 a month ago.
However, Anachart.com reported that 20 analysts now have an average target of $30.03, up from $26.51 a month back.
This suggests a potential rise in value, backed by an increase in analyst price targets following today’s results.
Thus, from both a free cash flow viewpoint and based on analyst expectations, CCL stocks seem to be undervalued.
That said, there’s no assurance that these targets will be hit in a timely manner. As I previously mentioned, it could be wise to set a lower buy-in target by using out-of-the-money (OTM) puts.
For instance, last month I proposed $19.00 and $20.00 puts, expiring on May 20th. Short sellers claimed returns of 3.68% and 5.45% from these strategies. However, CCL shares closed at $23.77 on June 20th, meaning short sellers didn’t need to purchase shares at the strike prices.
Currently, looking at the expiration date for July 18th, the strike price premium for the $24.00 put option is $0.32, while the $24.50 option is priced at $0.44.
This suggests that short sellers with a $24.00 put would see a yield of about 1.333% (i.e. $0.32/$24.00), whereas those with the $24.50 put would see a yield of roughly 1.80% (i.e. $0.44/$24.50).
It’s notable that these two strike prices hover between 4.5% and 6.5% below the trading price. This indicates that investors could achieve an average yield of around 1.567% from these strategies next month.
Considering immediate income, the breakeven point for investors stands at about $23.87, which is approximately 7% lower than the current trading price.
This approach seems optimal for lowering one’s buy-in price to invest in CCL stocks, along with a projected gain above +45%.
Taking into account the strong free cash flow, analyst perspectives, and the available short strategies, CCL clearly presents as undervalued currently.
