Mark R. Hake, CFA
6 min read
Carnival Corp. (CCL) reported strong EBITDA and net income results today for its fiscal Q2 ended May 31 and raised guidance for the year. Moreover, its free cash flow more than doubled, and FCF margins skyrocketed. That leaves CCL stock undervalued by at least 34% at $34.62 per share. This article will show why.
CCL is at $25.74 in midday trading on Tuesday, June 24, up over 7% for the day. However, based on its strong FCF margins and analysts' revenue forecasts, CCL stock could be worth substantially more, as this article will show.
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I previewed this result in my last Barchart article, on May 11 ("Carnival Corp's Free Cash Flow Could Surprise Analysts - Is CCL a Buy Here?). I showed how CCL stock could be worth $28.28 per share.
Based on its strong FCF margins, I think CCL could be worth over one-third more than its present price, or $34.62 per share. Here is why.
Let's cut to the chase here. You can read their earnings report, with lots of stats, and management's guidance (which is now higher). But the most important fact, from an investor's standpoint, is the amount of free cash flow (FCF) Carnival generated.
That can be seen on page 11 of the report. The problem is that Carnival does not explicitly publish its free cash flow (FCF), and you have to calculate it. I have done that in the table below.
It shows that for the quarter ending May 31, Carnival generated over $1.54 billion in free cash flow, since FCF equals operating cash flow less capex. That represented over 23.4% of its revenue. For the six months ending May 31, its FCF margin was 15.3%.
That implies its future FCF margin could average about 19.35%. We can use that to forecast FCF going forward.
Given management's higher revenue guidance and using analysts' forecasts, we can project out its next 12 months (NTM) free cash flow.
Analysts now project between $26.11 billion in revenue this year (to Nov. 2025) and $27.12 billion next fiscal year. That implies its run rate for the NTM is $26.615 billion. But analysts are likely to revise their sales forecast upward after today's results.
