This year has seen modest gains for Carnival Corporation (NYSE: CCL), with shares up 15% so far. But while the cruise line’s revenue and earnings now exceed pre-pandemic levels, an extremely overleveraged balance sheet remains a cause for concern. Let’s discuss how the next five years could play out for this iconic cruise company.

The Economic Landscape and Consumer Behavior

If you spend a lot of time on major social media platforms like YouTube or TikTok, you can be forgiven for assuming America is in another Great Depression. But while years of above-average inflation have eroded consumer-purchasing power, large segments of the population are still spending like there is no tomorrow. Luxury-experience providers like Carnival Corporation are a major beneficiary of this trend.

Third-quarter earnings for the cruise line rose 15% year over year to a record $7.9 billion, driven primarily by passenger-ticket sales. The company is also using its vessels more efficiently with better occupancy and less downtime, helping power a dramatic 34% jump in operating income to $2.2 billion.

CEO Josh Weinstein expects momentum to continue in 2025 and 2026. And if that happens, Carnival will be on track to pull off SEA Change — its three-year plan to dramatically reduce emissions, increase earnings before interest, taxes, depreciation, and amortization (EBITDA), and increase the return on invested capital (ROIC), which is a measure of how well a company generates profits from the cash invested into its business.

However, one goal may be even more important than all of these: reducing debt.

The Weight of Debt in Carnival’s Future

While Carnival’s revenue and operating income have exceeded pre-pandemic levels, the cruise company’s stock is still 68% below its all-time high of $66, reached in early 2018. This discrepancy has a lot to do with its long-term debt, mostly accumulated during the crisis.

As of August, Carnival’s balance sheet had $26.6 billion in long-term debt. While this is down by almost $2 billion from the prior-year period, it is still extremely high compared to cash and equivalents of just $1.5 billion. For investors, overleverage comes with a host of problems, including interest expense, which totaled a whopping $431 million in the third quarter alone. Over a full year, this could add up to a $1.72 billion hit to net income.

Image source: Getty Images.

On top of interest expense, the debt principal also has to be paid down — with the sum ramping up from $1.8 billion in 2025 to a staggering $8.8 billion in 2028. This is money that could have otherwise been reinvested into Carnival’s business or returned to shareholders.

However, the good news is that management can easily kick the can down the road by refinancing the debt. This would involve taking on new loans and lower interest rates to pay off older (typically higher-interest) notes when they come due. And with the federal funds rate on a downward trend, this should be relatively easy for Carnival to pull off.

Analyzing Carnival Stock’s Potential

While Carnival Corporation has an alarming amount of debt, its rapidly improving operations and profitability mean it can likely grow out of the problem. And with a forward price-to-earnings (P/E) multiple of 13, the stock trades at a huge discount compared to the S&P 500 average of 25.

It’s impossible to predict how much longer the American consumer will be willing to spring for high-priced luxury experiences. However, unless the macroeconomic environment changes, Carnival stock finally looks positioned to outperform over the next five years and possibly beyond.

Should you invest $1,000 in Carnival Corp. right now?

Before you buy stock in Carnival Corp., consider this:

The Stock Snub: Carnival Corp Left Out of the Best 10

Leaping beyond conventional investment wisdom, recent reports suggest that finance experts have identified the 10 most promising stocks for investors to consider, with Carnival Corp notably missing from the list. While Carnival Corp may have missed this particular boat, the selected stocks are projected to yield stellar returns in the forthcoming years.

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Embrace the Vision: Unveiling the Top 10 Stocks

For those intrigued by the potential profits awaiting in the stock market, the list of top 10 stocks beckons. Diverging from traditional picks, these options are heralded as game-changers in the investment landscape, promising substantial returns for savvy investors. Delve into the possibilities and explore the offerings that could redefine your financial future.

Reflecting on the Journey: Past Performance and Future Prospects

As investors ponder Carnival Corp’s absence from the elite 10, it serves as a reminder of the fluidity of financial markets. The shifting tides of investment choices underscore the need for adaptability and foresight in navigating the unpredictable terrain of stocks. By reflecting on past successes and analyzing future opportunities, investors can carve a path towards financial prosperity.

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Disclaimer: This article is for informational purposes only and is not intended as investment advice. The author has no positions in any of the stocks mentioned herein. Readers are encouraged to conduct their own research before making any investment decisions.