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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.
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.
Strong Free Cash Flow and FCF Margins
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.
So, let's forecast $27 billion in NTM sales. Applying an average of a 19.35% margin results in over $5 billion in FCF:
$27b NTM sales x 19.35% = $5.23 billion NTM FCF
Just to be conservative, let's use a $5 billion FCF forecast to value the stock.
Target Price for CCL Stock
Today, Carnival Corp has a market value of $34.75 billion at $25.74 per share. So, if the market assumes its 6-month $1.859 billion FCF doubles (i.e., $3.718b forecast) that means it is trading on a 10.69% FCF yield:
$3.718b / $34.75b mkt cap = 0.1069 = 10.69% FCF yield
Therefore, if we apply this to our $5 billion forecast, its projected NTM market cap is over $46.7 billion:
$5b / 0.107 = $46.73 billion NTM market cap
That implies its market value could rise by 34.5%:
$46.73b / $34.75b = 1.345 = +34.5%
In other words, CCL stock is worth at least 34.5% more:
$25.74 x 1.345 = $34.63 p/sh
That is why CCL stock looks deeply undervalued here. Moreover, analysts tend to agree.
Analysts' Target Prices
For example, Yahoo! Finance shows that 29 analysts have an average price target of $28.55 per share. That is higher than the $27.55 average price I reported in my last Barchart article a month ago. Similarly, Barchart's mean survey price is now $28.17, up from $27.67 a month ago.
However, AnaChart.com, which tracks recent analyst recommendations and price targets, shows that 20 analysts now have an average price target of $30.03. That is up from $26.51 a month ago.
The bottom line is that AnaChart's average price target is 16.7% higher than today's price. Moreover, after today's results, expect to see these average price targets rise, just as I raised my target price.
As a result, both from a free cash flow standpoint, and using analysts' price targets, CCL stock looks deeply undervalued.
However, there is no guarantee this target can be reached anytime soon. It makes sense to set a lower buy-in target by shorting out-of-the-money (OTM) puts, as I described in my last article.
Shorting OTM Puts to Set a Buy-In Price
For example, last month I suggested shorting the $19.00 and $20.00 puts expiring May 20. The short seller would have made 3.68% and 5.45% respectively from these plays. CCL stock remained out-of-the-money on June 20 (i.e., it closed at $23.77). So, the short seller had no obligation to buy shares at the strike prices.
Today, the July 18 expiry period shows that the $24.00 put option strike price has a premium of $0.32, and the $24.50 is at $0.44.
That means that a short seller of the $24.00 put makes an immediate yield of 1.333% (i.e., $0.32/$24.00) and the $24.50 put has a short-put yield of 1.80% (i.e., $0.44/24.50).
Note that these two strike prices are between 4.5% and 6.5% out-of-the-money (i.e., below the trading price). That means that using a 50/50 mix of these two strike prices, an investor could make an average yield of $1.567% over the next month:
$32+44 = $76 income
$76 / ($2400 +$2,450) = $76/$4850 = 0.01567 = 1.567% 1 month yield
Moreover, given the immediately received income, the investor's breakeven would be $23.87 (i.e., ($4850-$76)/200 shares = $23.87)), or 7% below today's trading price.
The bottom line is that this is a great way to set a lower buy-in price target for investing in CCL stock. Moreover, the investor's upside is over +45%:
$34.63 target price /$23.87 breakeven price = 1.45 = +45%
Meanwhile, an investor gets paid over 1.5% to be willing to buy the stock at an average price of 24.25 using a mix of these two short-put plays.
So, given Carnival Corp's strong free cash flow, analysts' price targets, and the short-put plays available, CCL looks deeply undervalued here.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
