Carnival’s Turnaround Is Near and CCL Stock Will Rally Further

I’ve changed my mind about Carnival Corporation (NYSE:CCL) since my last article on CCL stock on May 11. The stock opened higher at $22.20 on Wednesday, June 10. I believe it can rally even further.

ccl stock
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I already wrote about my change of heart on Royal Caribbean (NYSE:RCL) on May 18, when I argued that RCL stock was a bargain. After that, the stock rose 58.9%, as I suspected it would.

In fact, both stocks both rose dramatically. CCL stock went up 50% over the past month and RCL spiked 61%. Investors are coming around to the idea that cruise line travel could pick up to normal levels by 2021. This might be earlier than previously estimated, according to Seeking Alpha‘s editors.

Economic Recovery and Vaccine Possibility Will Help CCL Stock

In other words, investors are writing off earnings for 2020 and looking in the future. That is how stocks work. They discount future cash flows and push up prices now in anticipation.

In this case, the higher payroll numbers that came out on Friday, as well as the higher oil and gas prices portend quick economic recovery. I believe that more of this will occur over the next several months.

The reason is that the likelihood of a vaccine cure for COVID-19 is becoming more of a possibility. President Donald Trump selected five pharmaceutical companies under Operation Warp Speed to get a COVID-19 vaccine by January 2021.

The effect this is having is that people will travel more frequently if they perceive that a vaccine is available. In fact, the anticipation of this cure might even be the reason that travel stocks are rising.

Deriving a Target Value for CCL Stock

As I explained in my article on RCL stock, I’ve abandoned my book value approach to valuing these stocks. A more appropriate measure might be to estimate what discount from normalized cash flow will occur in 2021. From there the stock’s value can be estimated.

For example, analysts are estimating that Carnival’s revenue will hit $15.25 billion by November 2021, according to Seeking Alpha’s analyst poll. This will be up from an estimated $10 billion by November 2020 (assuming cruise travel opens up).

For the year to November 2019, Carnival’s operations generated $20.8 billion in revenue and almost $3 billion in net income. That represents a margin of 14.375%. Normalized diluted earnings were $2.76 per share.

Using these numbers, we can estimate 2021 earnings. Let’s say the margins will be slightly lower due to higher interest expenses, etc. With revenue of $15.25 billion with a 12% margin, net income will be $1.83 billion. And since Carnival has 685 million shares outstanding, earnings per share will be $2.67 per share.

That puts CCL stock on a price-to-earnings ratio of just 8 times 2021 earnings (i.e. $21.51 divided by $2.67). I suspect that a more normal ratio, as 2021 approaches, will be at least twice to 2.5 times that level.

That means the price target for CCL stock is 16 to 20 times earnings or $42.72 to $53.40 per share.

What’s Next With Carnival Stock

Here is what I predict: once a vaccine is developed, CCL stock will be at least 100% to 150% higher than today. It is possible the stock will move slowly to that level.

But a much more likely possibility is the stock will spike to that level on any positive news. These days, investors are buying first and asking how high later.

That is why I think it is completely possible that CCL stock could be 100% to 150% higher than today by the end of the summer. There could even be panic buying relating to these travel stocks at some point. That would push them higher than where they should be rationally valued.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.


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