One of the industries most hurt by the COVID-19 pandemic was the cruise industry, as cruise ship operators by and large suspended operations. With the pandemic-era lockdowns now long in the rearview mirror, however, passengers have been flocking back.

One company benefiting from this trend is Carnival Corp. (NYSE: CCL) (NYSE: CUK). However, the stock is still well below where it traded before the pandemic.

Carnival recently reported results for its fiscal third-quarter (ended Aug. 31). Let's take a closer look to see if the company can continue to rebound.

Record results

Carnival posted strong results for Q3, setting a number of revenue and profitability records. Just as important, demand remains strong with the company seeing impressive advanced bookings for both 2025 and 2026.

For the quarter, the cruise ship operator's revenue hit an all-time quarterly high of $7.9 billion, up 15%. Ticket revenue rose 15% to $5.2 billion, while onboard revenue was also 15% higher.

Available lower berth days (or ALBDs), which is a measure of capacity based on cabins holding two passengers, climbed 6% to 25.3 million. Occupancy, meanwhile, jumped from 109% to 112%. Occupancy is based on two passengers per cabin, and thus can exceed 100%. These metrics show the company both increased capacity and subsequently filled that capacity.

Net yields, which measure revenue minus variable costs (such as commissions, transportation, etc.) per ALBD, rose 9% to $233.87. Its increase in gross margin per ALBD was even higher, with this metric rising 19% to $116.77 as variable costs decreased. Both these metrics show that not only is the company growing revenue based on its increased capacity, but it is also seeing better margins and profitability.

These metrics helped the company produce record operating income and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter. Operating income jumped 34% to $2.2 billion, while adjusted EBITDA climbed 25% to $2.8 billion. Adjusted earnings per share (EPS) jumped 48% to $1.27.

Carnival is projecting fiscal Q4 adjusted EPS to rise 20% to $1.14 billion and for adjusted EPS of $0.05. Capacity is expected to be 3% higher compared to last year with ALBDs of 24 million. It expects new yields to rise by 7%.

For 2025, the company said that nearly half its capacity is booked, which is well ahead of where it was last year. This is leading to record ticket prices. Meanwhile, it said 2026 bookings are off to an unprecedented start.

While things appear to be going very well for Carnival, the biggest reason the stock trades at half the price it did before the pandemic is the debt needed to take get through that period. The company ended last quarter with $27.3 billion in net debt. By comparison, it had $11 billion in debt at the end of November 2019.

Carnival has generated about $5 billion in operating cash flow so far this year, but only $1 billion is free cash flow. It said its first, second, and third capital allocation priorities are to continue to reduce debt. Its leverage (net debt/adjusted EBITDA) was down to 4.5 times and it is looking to become investment grade by the end of 2026.

The company has three ship deliveries spread out across the next four years. It also has two notes with large fixed interest rates (more than 10%) that become callable the middle of next year. Refinancing them should help lower its interest expense and improve cash flow.

Is Carnival a buy?

Carnival has done a great job with its business as cruise demand has surged. The key for the stock going forward, though, is continuing to reduce its now high debt load. Its leverage at 4.5x is not outrageous, but the sheer amount of debt and the cyclicality of the cruise industry are issues to watch. If the industry takes a turn for the worse because of the economy, then the EBITDA side of the equation could quickly become smaller.

Right now other areas of travel have begun to see slowdowns, including airlines, hotels, and amusement parks. The cruise industry lags behind a bit with trends due to bookings often being further out. Right now, though, there appears to be clear sailing ahead and the slowdown in other travel does not appear to be impacting cruise ship bookings.

That said, given Carnival's debt load and weakness in other areas of travel, I'd prefer to err on the side of caution and stay on the sidelines.

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

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

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Carnival Corp. wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

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

Could Strong Bookings Propel Carnival Stock in the Years Ahead? was originally published by The Motley Fool