In a world facing recession fears, COVID-19 restrictions, and an ongoing war in Ukraine, many investors have bailed on the cruise industry. Indeed, fear has plagued cruise stocks for the past two years. This brings to mind a favorite quote from investing legend Warren Buffett, who once said to be "greedy when others are fearful."
With plenty of exceptions to the above rule, inquisitive investors might hesitate before buying the dip on Carnival (CCL -0.89%), simply due to the uncertainty that lies ahead for the industry. Let's take a closer look at Carnival's last quarter, its performance this year, and why I think the stock is currently a buy.
Passenger revenue exceeds 2019 levels in Q4
The Miami-based cruise operator finished the year with record-breaking Black Friday and Cyber Monday bookings. Customer deposits reached a fourth-quarter record of $5.1 billion in November 2022, eclipsing the previous November 2019 record of $4.9 billion. As a result, Carnival's full-year 2023 total advanced bookings exceed its historical average -- even at higher prices.
Fourth-quarter revenue per passenger cruise day rose 0.5% over 2019's robust levels, and occupancy landed just 19% below Q4 of 2019 as Carnival climbs its way back to a historical, pre-pandemic baseline. Having reached a significant milestone with passenger revenue outpacing 2019 (albeit slightly), CEO Josh Weinstein affirmed, "We're gaining momentum on our return to strong profitability."
Carnival's fourth-quarter passenger-derived revenue also marked significant sequential improvement for the company, considering this same revenue sank 29% below 2019 levels in Q3 -- despite occupancy being only 8% below 2019. In other words, with less occupancy in Q4 than Q3, Carnival managed to earn more revenue from onboard passengers.
All in all, it's been a year of progress for Carnival, which restarted service on 90 ships, reboarded more than 100,000 staff members, and resumed operations on its eight private island and port destinations worldwide. Weinstein was excited to welcome back Carnival's "nearly 9 million guests" during the fourth-quarter earnings call.
Image source: Carnival.
Lingering headwinds
In spite of recent strides, two looming factors still pose risks to Carnival: COVID-19 and the war in Ukraine. While bookings for Carnival cruises rose in accordance with the easing of COVID-19 restrictions throughout the year, the cruise industry still faces inconsistent protocols across the world -- making it difficult to coordinate international travel.
During Carnival's Q4 earnings call, Weinstein explained, "Australia's reopening is where North America was a year ago, and Japan is closer to two years behind." Given the uncertainty in China, Carnival has reduced its presence in the region significantly. Fortunately for a cruise company with mobile assets, Carnival has reallocated its fleet to areas where demand remains robust.
Also a concern for Carnival, the war in Ukraine continues to impact bookings across its European destinations. Historically, one-third of Carnival's guests have come from regions other than North America, such as Australia, Asia, and the Baltics. The ongoing conflict in Ukraine has not only scrambled Carnival's itineraries across Europe, but has "weighed heavily on consumer confidence in those regions," according to Weinstein.
2023 is looking up
Despite geopolitical and COVID-related challenges, booking volumes continue to strengthen for Carnival, and a continued reduction in cancellations has been enjoyed. Weinstein pointed out "a measurable lengthening in the booking curve" across all brands during the Q4 earnings call.
Carnival now anticipates current-quarter occupancy to be at 90% or more of 2019's baseline occupancy, which would mean an improvement over Q4's impressive 84%. And by summer of 2023, the company expects occupancy levels to reach 100% of 2019 levels -- possibly more.
Revenue per passenger in Q1 is forecast to be up between 5.5% and 6.5% compared to 2019 levels, which, if accomplished, will make a great start to the new year. Investors like myself should pay close attention to Q1's results to make sure Carnival remains on course as 2023 progresses.
Due to the company's positive momentum and resilience in the face of unforeseen challenges, as well as the anticipation of a record-breaking 2023, I think Carnival stock is a buy at its current price levels.
