On July 27, 2023, Carnival Corp (CCL, Financial) recorded a 4.67% gain, bringing its stock price to $18.48. Despite this uptick, the company reported a Loss Per Share of $2.79. This article seeks to answer a critical question: Is Carnival (CCL) a potential value trap? To get a comprehensive understanding, we invite you to delve into our detailed analysis.
Company Introduction
Carnival, the world's largest global cruise company, operated 90 ships at the end of fiscal 2022. Its brand portfolio includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America, among others. In 2019, prior to the COVID-19 pandemic, Carnival attracted about 13 million guests, a figure it aims to surpass in 2023. With a market cap of $24.1 billion, Carnival's stock price of $18.48 per share is worth scrutinizing against its GF Value of $31.38 to determine its fair value.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value. If a stock's price is significantly above the GF Value Line, it is likely overvalued, and its future return may be poor. Conversely, if it's significantly below the GF Value Line, its future return could be higher.
Our analysis indicates that Carnival Corp (CCL, Financial) could be a potential value trap. With a current price of $18.48 per share and a market cap of $24.1 billion, Carnival's valuation deviates from its GF Value, signaling caution for investors.
Financial Strength
Investing in companies with weak financial strength can lead to permanent capital loss. Therefore, it's crucial to assess a company's financial strength before purchasing its shares. Carnival's cash-to-debt ratio is 0.13, ranking it lower than 75.18% of companies in the Travel & Leisure industry. This suggests a poor balance sheet, earning Carnival a financial strength rank of 3 out of 10.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Carnival has been profitable 7 out of the past 10 years. In the past twelve months, the company reported a revenue of $17.5 billion, but a Loss Per Share of $2.79. Its operating margin is -8.38%, ranking it lower than 74.97% of companies in the Travel & Leisure industry. This results in a profitability rank of 6 out of 10.
Growth is a crucial factor in a company's valuation. Faster-growing companies create more value for shareholders, especially if the growth is profitable. However, Carnival's 3-year average annual revenue decline rate is 30%, which ranks it lower than 87.78% of companies in the Travel & Leisure industry.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Carnival's ROIC is -2.75, and its cost of capital is 9.98.
Why Carnival Could Be a Value Trap
Despite the signs of potential undervaluation, there are risks associated with Carnival's financial status. The company's Altman Z-score stands at 0.39, indicating increased bankruptcy risk and placing it in the financial distress zone. Ideally, a Z-score above 2.99 reflects a safer financial position. To understand the Z-score's role in assessing a company's financial risk, please click here. Additionally, the company's 5-year revenue per share decline rate stands at 32.8%, indicating a decline in sales.
Conclusion
In conclusion, Carnival (CCL, Financial) shows signs of being a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks lower than most companies in the Travel & Leisure industry. To learn more about Carnival stock, you can check out its 30-Year Financials here.
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