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Why Cruise Stocks Popped Before Carnival's Earnings

Motley Fool - Tue Mar 21, 10:10AM CDT

What happened

With less than a week to go before first-quarter earnings, shares of Carnival(NYSE: CCL) got a boost this morning when German megabank Deutsche Bank announced a short-term upgrade to buy on the stock that it still considers a long-term hold.

Carnival stock is full speed ahead on the news, its shares up 6.4% just after 10 a.m. ET. Rival cruise stocks Royal Caribbean Cruises(NYSE: RCL) and Norwegian Cruise Line(NYSE: NCLH) are steaming ahead in its wake, up 4.7% and 5.2%, respectively.

So what

That's logical. If Deutsche Bank thinks Carnival is only a hold long-term, but a buy in the immediate future, it stands to reason than Deutsche Bank thinks next week's earnings are going to look pretty good -- and if that happens, they could elicit cheers all across the cruise industry.

The bank commented today that sentiment has been "weakening" in the days heading into Carnival's earnings, lowering the bar for outperformance in Monday's report, such that any result better than Wall Street's expected $0.60-per-share loss could send the shares shooting higher. The analyst will be focusing especially on Carnival's guidance for the rest of this year, reports StreetInsider, predicting good news could "elicit a positive reaction" and calling guidance a potential "catalyst" for gains.

And because what's good news for one cruise company will probably be taken as propitious for all cruise companies, it makes sense that this catalyst could lift not only Carnival, but Royal Caribbean and Norwegian cruise as well.

Now what

But don't be fooled. Longer-term, Deutsche Bank remains cautious about Carnival stock.

Although 2023 revenue is going to look pretty impressive in comparison to 2022 revenue -- up as much as 73% to $21 billion according to most analysts -- Deutsche Bank isn't as confident in Wall Street predictions of further growth (to $23.5 billion) in 2024. To the contrary, Deutsche Bank worries that after this year's rebound, revenue at Carnival will plateau, and earnings before interest, taxes, depreciation, and amortization (EBITDA) will flatline in 2024.

Unfortunately for investors, Deutsche Bank might be right about that. While there's the potential for revenue to grow 12% year over year as expected, it might not. And even if it does, there are any number of factors that could potentially keep revenue growth from turning into profit growth -- higher fuel prices for example, inflation in labor costs, and most troublingly, rising interest expense on Carnival's massive $31.9 billion net debt load, as the Fed raises interest rates to fight inflation.

Investors will know more on interest rates when the Federal Reserve Open Market Committee announces its decision to raise, lower, or maintain interest rate targets tomorrow. They'll know more about what Carnival (and its peers) might think about that a few days later, as the Fed's decision will likely factor into the company's guidance.

Until they know more, though, it's probably best for cruise investors to be cautious heading into Carnival's report.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

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