Carnival Corp. (NYSE:CCL) will benefit from growing popularity in cruises as well as an expected rise in profits. CCL stock is set to rise after Carnival announces its earnings for the quarter ending Feb. 28 and a refreshed 2022 outlook.
At $17.21 per share as of March 11, Carnival stock has started to move up from its trough price of $15.53 on March 7. However, this is after having dropped precipitously from $26.17 on Sept. 28, a decline of 34.8% in the past six months.
That makes CCL stock look attractive now. That’s because it appears the company is finally going to start making profits soon.
Where Things Stand at Carnival
As I wrote last month, cruises are becoming more popular, especially as Covid-19 has died down. As a result, analysts now expect the quarter ending Feb. 28 will result in sales of $2.3 billion, according to an analyst survey by Refinitiv published by Yahoo! Finance. That is more revenue than the company made in all of 2021 at $1.908 billion.
Moreover, analysts now expect for the year ending Nov. 30, 2022, Carnival will produce $15.21 billion in revenue. That is 2.7 times the $5.595 billion in sales the company made in 2020. But it will still be below the $20.8 billion in revenue Carnival made in 2019.
Nevertheless, as CCL stock now has a market capitalization of $20.16 billion as of March 11, it’s trading for just more than 1.3 times forward sales. That can be seen by dividing $20.16 billion by analysts’ $15.21 billion sales forecast for 2022. This is not a very expensive multiple and indicates CCL stock could be undervalued.
Valuing CCL Stock
For example, Morningstar has a tab on Carnival stock that shows a price-to-sales (P/S) multiple range of 1.29x to 2.72x for the past five years. The average multiple during that period was 1.95x, or roughly 2 times sales.
That implies CCL stock is too cheap compared to its own valuation history. For example, based on this assessment, the stock could rise 50% from 1.3 times sales to 1.95 times. That would put its price target at $25.82, up 50% from $17.21 on Friday.
Unfortunately, so far analysts are not yet predicting net income profits for the company for 2022. As a result, we can’t use a price-to-earnings (P/E) approach to valuing CCL stock.
However, it is possible Carnival could be getting close to becoming free-cash-flow positive by the end of the year. For example, recently Barron’s wrote that one of Carnival’s competitors, Norwegian Cruise Line Holdings (NYSE:NCLH), is forecast to become profitable in the second half of 2022.
What to Do With CCL Stock
Analysts tend to agree with my assessment here. For example, TipRanks’ survey of eight Wall Street analysts’ reports on the stock in the last 3 months has an average price target of $27.29. That represents an upside of 58.6% for the CCL stock from Friday’s price.
In addition, Yahoo! Finance indicates 13 analysts have an average price target of $28 for the stock. That represents an even higher upside of 62.3% for the stock.
So, both sets of analyst surveys imply the average price target is even higher than my simple 50% upside projection based on the historical P/S model.
This assumes CCL stock will slowly rise to its average P/S multiple, but over time reach the average of its past multiple. Once the company becomes profitable or cash-flow positive — or even close to this — we can switch to a more robust valuation model.
But I suspect that inherently, the market senses this anyway. As sales rise, the possibility for the company to cut costs and become profitable becomes easier, as the company has more flexibility.
As a result, expect to see CCL stock rise at least 50% over the next year. This will happen as the market acclimates to the growing popularity of cruising and the possibility of profits.
On the date of publication, Mark Hake did not hold (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.