Will Carnival Stock finally post a profit this week?

It’s time to Carnival (CCL 5.96%) (CUK 6.18%) to make its quarterly stopover on the island not so deprived of financial reality. The world’s largest cruise operator will announce the results of its third fiscal quarter, which ended in August, on Friday morning. Investors are hoping this is the cure to end the industry’s battle with seasickness of late.

The market is resisting a major year-over-year improvement, and that’s no surprise since only a limited number of ships among Carnival’s many fleets were on the high seas last summer. An analyst also raised his price target on depressed Carnival shares, and it’s usually an encouraging indicator when Wall Street adjusts its outlook for the better ahead of a telling trade update.

Which direction will Carnival be sailing in after the new numbers are released? Let’s take a closer look to see why it’s okay to be cautiously optimistic about the future of the cruise industry this week.

Image source: Getty Images.

breaking waves

It hasn’t been easy for Carnival’s investors. The stock has fallen 56% this year, hitting its lowest close in nearly two months on Monday. You would expect a stock that loses more than half its value in a year to be in shock, but Carnival navigates these tricky waters very well. Analysts see revenue increasing sevenfold to $500 million, a figure that has been rising lately.

Wall Street is weathering a much smaller quarterly deficit than the red ink of the previous year, and things could be even better. Some of the most optimistic analysts are looking at earnings for the three months ending in August. It would certainly be heartening for Carnival to turn in a positive net profit after 10 consecutive quarters of losses, but the trend is not kind as far as recent updates go.

EPS (estimated) EPS (actual) Surprise
Q3 2021 ($1.25) ($1.55) (24%)
Q4 2021 ($1.27) ($1.52) (20%)
Q1 2022 ($1.00) ($1.57) (57%)
Q2 2022 ($1.14) ($1.63) (43%)

Source: Yahoo! Finance.

Investors have only seen bigger than expected losses over the past year. It’s not the kind of momentum that long-serving stocks like to see, but business has clearly picked up for the industry during the critical summer season. Many people have resumed cruising. The real question is whether the increase in passenger numbers can scale to the point of turning the corner on the baseline.

Most input costs are higher than they were a year ago, but there has been a sequential relief in energy and some feed costs. Even the most pessimistic analysts are targeting a loss of just $0.60 per share, considerably softer than the shortfalls of at least $1.50 per share in each of the latest reports. Carnival managing to not only beat the Wall Street consensus of $0.13 a share, but turn a real profit would be a big moment for the cruise line. It would also likely increase the shares of its competitors whose fiscal quarters end a month later.

Financial truist analyst Patrick Scholes raised his price target on the stock from $8 to $10 last week. It still has a sell rating on the stock, but its channel checks show flashes of optimism. Announcements last month of relaxed vaccine and testing rules are driving up booking volumes. Later this week, Canada will be the last country to drop most travel security protocols, making it easier for travelers to come and go.

Scholes still has his concerns – hence the sell rating. Cruise operators have taken on new debt or issued new stock to ride out the lull. Leverage is problematic in this climate of soaring borrowing costs and equity issues will dilute the recovery in earnings per share. However, there’s no denying that a strong Carnival report — and equally optimistic commentary on future booking trends — can send the entire industry soaring within days. It’s time to see how seaworthy cruise line inventory was during the revealing summer season.

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