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Yahoo Finance Plus Is Carnival (CCL) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Value-focused investors are always seeking stocks priced below their intrinsic value. Carnival Corp (NYSE:CCL) is one such stock that has caught the attention of many. Priced at $12.91, the stock witnessed a 5.39% loss in a single day and a 31.8% decrease over the past three months. According to its GF Value, the stock's fair valuation stands at $32.16.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from GuruFocus' exclusive method. The GF Value Line on our summary page provides an overview of the stock's fair value. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus' adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
However, investors should consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Carnival Corp (NYSE:CCL) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.53, and the company's revenues and earnings have been on a downward trend over the past five years. This raises a crucial question: Is Carnival a hidden gem or a value trap?
Altman Z-score: A Measure of Financial Health
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Unpacking Carnival's Low Altman Z-Score
A closer look at Carnival's Altman Z-score reveals potential financial distress. The Retained Earnings to Total Assets ratio offers insights into a company's capability to reinvest its profits or manage debt. Evaluating Carnival's historical data (2021: 0.17; 2022: 0.04; 2023: 0.01), we observe a declining trend in this ratio. This indicates Carnival's diminishing ability to reinvest in its business or effectively manage its debt, negatively impacting its Z-Score.
Declining Revenues and Earnings: A Red Flag
A sustained decline in revenues is a telltale indicator of a company's potential trouble. In the case of Carnival, both the revenue per share (2019: 29.52; 2020: 15.01; 2021: 0.58; 2022: 8.30; 2023: 15.37) and the 5-year revenue growth rate (-32.8%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Carnival's products, or escalating competition in its market sector.
Sluggish Earnings Growth: Another Red Flag
Despite its low price-to-fair-value ratio, Carnival's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Carnival's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Conclusion: A Potential Value Trap
Without a clear turnaround strategy, there's a risk that Carnival's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity. Investors should exercise caution and conduct thorough due diligence before investing in Carnival Corp (NYSE:CCL).
Find stocks with high Altman Z-Score using the Walter Schloss Screen and stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
This article first appeared on GuruFocus.
