Shares of cruise ship operator Carnival (NYSE:CCL) continue to defy gravity, overcoming prior anxieties in part due to an assessment upgrade by Jefferies. In addition, the latest read on inflation offered investors much encouragement, leading to a dramatic leap in CCL stock. Better yet, for the institutional investors that represent the majority holders of Carnival’s equity, their patience may be rewarded.
Sparking the upside on the final day of June was Jefferies analyst David Katz, who upgraded the cruise line to “buy” from “hold.” As a Seeking Alpha report mentioned, Katz emphasized that Carnival is pivoting toward cash flow, deleveraging and equity expansion. Specifically, he spotlighted expectations that Carnival will average $5 billion in cash from operations for the next three years.
Also, the analyst believes that the company will leverage, on average, about $3 billion of adjusted free cash flow (FCF) to pay down debt through 2026. Katz also anticipates Carnival’s leverage to progress downward from 6.8X in fiscal year 2023 to 4.3X in FY 2024. For context, the leverage sat at 2X in 2019. Therefore, a path may exist for CCL to return to investment-grade metrics.
Institutional Investors Banking on CCL Stock
Regarding broader fundamentals, Katz sees clear sailing for CCL stock. Specifically, the analyst anticipates that Carnival should benefit from lower fuel costs, thus yielding operating efficiencies. The latest read from the core personal consumption expenditures price index adds credibility to this argument. Closely watched by the Federal Reserve, the index rose less than expected in May.
“This is excellent news on the inflation fight,” remarked Jamie Cox, managing partner for Harris Financial Group. “If you don’t believe disinflation is happening, you aren’t paying attention,” Cox added. Certainly, it appears that the biggest players in CCL stock have been paying close attention.
According to data from Yahoo Finance, institutional investors hold 53.35% of all outstanding Carnival shares. Further, they hold 58.01% of the float or the total shares outstanding minus closely held shares of CCL stock. Specifically, the top five institutional holders are as follows:
- Vanguard Group: 113.35 million shares or 10.16% outstanding.
- Blackrock (NYSE:BLK): 62.24 million shares or 5.58% outstanding.
- The Saudi Arabian Public Investment Fund: 50.83 million shares or 4.55% outstanding.
- State Street (NYSE:STT): 36.25 million shares or 3.25% outstanding.
- Geode Capital Management: 20.5 million shares of 1.84% outstanding.
Although the latest endorsement of the recovery thesis of CCL stock encouraged retailer investors, Gurufocus still points out that, technically, Carnival represents a distressed enterprise (based on a poor reading of its Altman Z-Score). Therefore, the cruise ship operator will still need to demonstrate meaningful progress in future quarters.
Why It Matters
Currently, TipRanks shows that analysts peg CCL stock as a consensus moderate buy. However, even with Friday’s upgrade from Jefferies, the average price target for CCL sits at $15.89, signifying more than 15% downside risk. For context, Carnival shares soared about 136% on a year-to-date (YTD) basis.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
