Analysts Now Love Carnival As The Start of Cruising Nears

Carnival Corp. (NYSE:CCL) is starting to get lots of love from analysts that see a bright future for the company. This is despite the fact that cruising is still not yet approved by the Centers for Disease Control and Prevention (CDC) in the U.S. Nevertheless, these analysts are now looking tw0 to three years in the future in terms of their assessment of CCL stock. That means their price targets are much higher than before.

Carnival (CCL) cruise ship on water in front of beach with chairs

Source: Flickr

For example, recently UBS analyst Robin Farley wrote in a report on May 18 that CCL stock is now worth $42, up from his prior target of $20. The basis for his optimism is this: “the longer-term outlook has improved as vaccines become more widespread.” Here is how that translates into a higher price target for CCL stock: “As a result, our 2021 and 2022 estimates are lower but our 2023 estimates are higher.”

In other words, he is now projecting out to 2023 to value CCL stock. Let’s look at what he is talking about.

Forecasts for Carnival Corp

If you look at Seeking Alpha‘s assessment of analysts’ forecasts for CCL stock, revenue is forecast to rise dramatically for the year ending Nov. 2022. The average analyst revenue is seen as spiking to $18.24 billion in 2022 from $3.58 billion in 2021. This is over 5 times the rate in 2021, implying a gain of over 400% in the coming year.

Moreover, sales for 2024 are now seen as rising to $23.68 billion by analysts’ estimates as polled by Seeking Alpha. This implies that revenue will spike 5.61 times in the space of a little over three years.

So no wonder the analyst at UBS raised his target price. For example, at a market value of $33.83 billion as of the close of June 4 (with CCL stock at $30.54) the price-to-sales (P/S) multiple for 2023 is just 1.43x. This is seen by dividing the market value of $33.83 billion by its 2023 forecast of $23.68 billion. That is a very cheap valuation ratio.

Here is what the analyst thinks. With his $42 target, the UBS analyst implies that the true market value should be 37.5% higher (i.e., $42 / $30.54 – 1). This implies that the P/S ratio will be 2 times sales. That is seen by dividing the higher target market cap of $46.52 billion ($33.83 billion x 137.5%) by 2023 forecast sales of $23.68 billion.

Moreover, this is probably not even high enough a valuation, given its history.

What Carnival Is Worth

Morningstar reports that over the past five years, including the sales declines in 2020, CCL stock has had a higher P/S ratio. Their five-year average P/S ratio for CCL is 3.01.

Let’s apply this to the present forecast. For example, if we used 3 times the Nov. 2023 sales forecast of $26.83 billion, Carnival stock should have a market value of $80.49 billion. That is 2.379 times the existing market cap of $33.83 billion, implying a potential gain of 138% over the next two years for CCL stock.

But not so fast. We have to take into account the time value of money, and associated alternative uses of capital. For example, most investors have a minimum hurdle ROI rate of 10% for any investment they make. This is the rough long-term average of the stock market’s return.

Therefore, at a 10% discount rate for the next 2.5 years to November 2023, we need to discount Carnival’s forecast revenue for 2023. This discount factor is 78.8%, and so the present value of the $26.83 billion in revenue is $21.142 billion (i.e., 0.788 x $26.83 billion).

Next, we apply the 3 times average P/S ratio (from Morningstar). That implies that the present value target should be $63.43 billion. This is 87.5% above today’s market cap of $33.83 billion. Therefore, the value of CCL stock is 87.5% higher than today’s price of $30.54, or $57.26 per share.

What To Do With CCL Stock

The UBS target price of $42 per share is not as high as my price target of $57.26. However, keep this in mind. The UBS is projecting a 12-month price rise of 37.5%, but my target price could take up to 2.5 years or less to happen. These are actually not that different.

For example, over 2 years, an 87.5% return works out to a 36.9% average annual return on a compounded basis each year. That is fairly close to the 12-month target return of 37.5% from the UBS analyst.

Either way, the outlook for CCL stock is quite good. Whether you make a 37.5% ROI or 36.9% ROI is somewhat irrelevant.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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