Carnival (NYSE: CCL) stock is still recovering from the pandemic. At around $16 a share, the stock is still nowhere near the $50-plus price tag it was trading at in late 2019.
The company accumulated debt during the past few years as the business struggled with factors outside of its control, but things have been improving significantly for Carnival.
Although the stock rallied 60% in the past 12 months, here are four reasons it still looks like a screaming buy today.
1. A positive operating profit for four straight quarters
Last month, Carnival reported its first-quarter earnings, for the period that ended Feb. 29. Not only did revenue totaling $5.4 billion rise 22% year over year, but the cruise ship operator also posted an operating profit of $276 million. It marked the fourth consecutive quarter when its operating profit was in the black.
The company did incur a net loss last quarter, but that was largely due to interest expenses. In terms of actual operating activities, it was profitable, and that's an important factor since operating income can be a better reflection of how the business itself is actually doing on a day-to-day basis because it comes before other income and expense items.
2. Bookings are at all-time highs
The cruise business is looking incredible; demand isn't abating. Even though prices are higher, Carnival says its booking volumes for the first quarter were again at record levels and exceeded expectations.
In the first quarter, customer deposits topped $7 billion, which is higher than the previous record Carnival posted in the first quarter last year, when they totaled $5.7 billion.
The strong booking numbers and customer deposits suggest that unlike many other industries, the cruise business might be inflation resistant since it caters to a more affluent customer base.
3. Free cash flow shows significant improvement
Another number that is key for investors to watch is cash flow. Carnival's $28.5 billion long-term debt is a big reason many investors are wary about investing in the stock right now. But the company is in good shape to bring that balance down, as its business is posting operating profits and generating plenty of strong cash flow.
During the quarter, Carnival's operating cash flow was a positive $1.8 billion, which is a huge improvement from the $400 million it generated in the same period last year. And adjusted free cash flow of $1.4 billion also looked incredibly strong compared with the $144 million in adjusted free cash that it reported a year ago.
4. A modest forward P/E multiple makes this a fairly cheap buy
Despite the positive results, the stock isn't trading as high as it probably should be at just 15 times its estimated future earnings (based on analyst expectations). That's a dirt-cheap multiple for a growing business that's showing resiliency at a time when many companies are struggling. By comparison, the average stock on the S&P 500 trades at nearly 22 times its future profits.
While there is risk, particularly relating to Carnival's debt -- which might suggest a discount is warranted -- the company is proving to be on positive path. Not only is demand strong, but its financials are also in much better shape than they were even a year ago.
Carnival is an underrated stock to load up on right now
As interest rates are likely to come down, many investors might soon become more bullish on Carnival's stock, especially with its results looking a whole lot stronger of late. But buying the travel stockbefore that happens could set investors up for even better long-term returns.
Should you invest $1,000 in Carnival Corp. right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
