Carnival currently trades at $30.44 per share and has shown little upside over the past six months, posting a small loss of 2.6%. The stock also fell short of the S&P 500’s 7.3% gain during that period.

Is there a buying opportunity in Carnival, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Carnival Will Underperform?

We're cautious about Carnival. Here are three reasons there are better opportunities than CCL and a stock we'd rather own.

1. Weak Growth in Passenger Cruise Days Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Carnival, our preferred volume metric is passenger cruise days). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Carnival’s passenger cruise days came in at 24.6 million in the latest quarter, and over the last two years, averaged 1.3% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Carnival has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.6%, lousy for a consumer discretionary business.

3. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Carnival’s five-year average ROIC was negative 1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Carnival, we’ll be cheering from the sidelines. With its shares trailing the market in recent months, the stock trades at 12.6× forward P/E (or $30.44 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.

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