Today, Carnival Corp (CCL) reported strong adjusted free cash flow (FCF) for the FY ending Nov. 30, with a 47% higher FCF margin than last year. This implies that CCL stock could be at least 22% undervalued, putting its value at $32.50 per share.
CCL is trading at $26.63 in midday trading, up 7.3% from Dec. 18 when it reached a near-term low of $24.82. In the past 4 months, CCL stock is up over 85% from $14.01 on Aug. 7.
The cruise company reported 15% higher revenue over last for its FY ending Nov. 30, 2024, and provided a cheery outlook for its upcoming FY ending Nov. 30, 2025.
Strong FCF and FCF Margins
Carnival also showed that its operating income was up 80% YoY to $3.6 billion. Similarly, its adjusted free cash flow (FCF) was $3.657 billion, up +70.4% over last year's $2.146 billion.
Moreover, the FCF for FY 2024 represents 14.6% of its $25.02 billion in revenue. That was 47% higher than last year's FCF margin of 9.94%.
This implies that Carnival could continue to generate large amounts of free cash flow going forward.
For example, Carnival projected that its adj. net income will be 20% higher in FY 2025. It also projected that adj. EBITDA (earnings before interest, taxes, depreciation, and amortization), a significant cash flow measure, will be $500 million higher at $6.61 billion.
That implies an 8.2% higher EBITDA result next year. So, it's reasonable to assume that FCF could rise as well. But by how much?
Projecting FCF Next Year
One way to measure this is to use the “conversion” of EBITDA into FCF. For example, last year the $6.11 billion in adj. EBITDA, which represented 24.4% of revenue, converted into $3.657 billion in FCF, or a 60% conversion factor.
So, using next year's analysts' revenue estimate of $26.15 billion, we can assume that its adj. EBITDA margin will rise to 25.3% (i.e., $6.61b/$26.15b), up 370 basis points over last year's 24.4% margin.
That implies that FCF margins could rise by 222 basis points (i.e., 60% conversion factor x 370 bp) from 14.6% to 16.72% of sales.
Here is what that means: $26.15 billion in est. FY 2025 revenue x 0.1672 = $4.37 billion in adj. FCF.
That adj. FCF would be 19.5% higher than the $3.657 billion it generated in FY 2024. This could lead to a significantly higher stock price.
Target Price for CCL Stock
In my last article on CCL stock, I wrote that one way to value CCL stock is use a 10% FCF yield metric. This assumes that at some point the company might restore quarterly dividends that it eliminated in early 2020.
At the time, Carnival Corp was paying a $2.00 dividend per share (DPS) and the stock was roughly around $50.00 per share. That gave it a normalized dividend yield of 4.0% (i.e. $2.00 DPS/ $50.00 price).
So, assuming it paid out 50% of its existing FCF to shareholders, and assuming a 5.0% dividend yield (to be conservative), this implies that a normalized valuation for CCL stock would be 10.0%.
So, here is how we can value CCL stock:
$4.37 billion in est. FCF in FY 2025 / 0.10 = $43.7 billion est. market capitalization
This is 22% higher than its present market cap of $35.767 billion (i.e., $43.7b/$35.767b -1 = 1.2218 -1 = 0.2218 = +22.18% higher
As a result, CCL stock has a target price that is 22.2% higher: $26.63 x 1.2218 = $32.53 per share.
Analysts Agree
Analysts on Wall Street have higher price targets as well. For example, AnaChart.com, a site that tracks sell-side analysts' price targets, shows that the average of 18 analysts is $30.77 per share.
That is significantly higher than 5 months ago, when I last wrote about CCL in Barchart. On July 30, AnaChart had an average price target from 18 analysts was $22.84. That shows that they have raised their target prices by 35% over that time.
It also shows that they still have an upside of 15.5% in CCL stock (i.e., $30.77/$26.63-1 = 0.1555 = +15.55%).
The bottom line is that CCL stock looks deeply undervalued, based on its numerous factors:
- its outlook,
- 8.2% higher adj. EBITDA projections,
- our 19.5% higher FCF estimate for next year,
- a +22% higher target price using a 10% FCF yield metric,
- as well as +15.5% higher analysts' price targets.
