• Challenges continue to pile up for cruise line operator Carnival
• A comeback may not be fully priced in, but CCL stock isn’t exactly cheap either
• Investors with a long time horizon could see shares sail to much higher prices

A year ago, it seemed as if cruise line operator Carnival’s (NYSE:CCL) troubles were behind it. Investors were confident the “vaccine recovery” meant full steam ahead on the company’s trip back to profitability. They bid CCL stock up to $31.52 in early June — its highest level since the pandemic decimated travel-related stocks. 

Instead of a vaccine recovery, though, the emergence of coronavirus variants like delta and omicron stymied Carnival’s recovery. Additionally, rising fuel costs are negatively affecting Carnival’s operating performance, while persistent inflation could dampen demand for leisure travel.

Although CCL stock has fallen to around $18 per share, it seems as if these negatives are not overly reflected in its valuation and a recovery in the coming year is somewhat priced in. However, if you have a long time horizon, there could be big gains ahead for those who can patiently wait for the company’s situation to finally improve.

Q1 Results Give Glimpse of What Future May Holds CCL Stock

On March 22, Carnival released its results for its fiscal first quarter, which ended Feb. 28. With the omicron variant affecting cruise demand, revenue for the quarter fell far short of estimates, coming in at $1.62 billion versus an expected $2.26 billion. Losses also came in wider than expected at $1.66 per share versus the $1.28 per-share consensus estimate.

Even worse, with its updates to guidance, management warned investors that new challenges (rising costs, including fuel costs) will join existing ones (the pandemic). There will also be some temporary costs related to getting its fleet of ships back in operation.

Although Carnival anticipates becoming profitable (on an adjusted EBITDA basis) in the second half of the year, it’s clear 2022, like 2021, will be another year of transition for the hard-hit travel company.

Investors who bought in around $30 per share last year overestimated the speed of Carnival’s recovery. Yet, even at today’s prices, a recovery remains baked into the valuation of CCL stock. Shares trade for around 12.9x consensus estimates for 2023 earnings ($1.43 per share) today. Historically, this stock has traded at a valuation not too far from this multiple (10x-15x).

But that’s not to say there’s minimal upside for investors diving into CLL stock around $18 per share.

More Upside in CCL Stock Than It Seems at First Glance

Based on 2023 earnings estimates, it may appear that CCL stock has little room to run. And short-term investors should continue to take a wait-and-see approach until the company releases results for its fiscal third quarter, which covers the summer travel season.

But if you have a timeframe measured in years rather than months, you may find it worthwhile to buy CCL stock today. It’s not as if the cruise operator is going to swing from a loss to $1.43 per share in earnings and then find itself struggling to grow earnings further as we put the pandemic further in the rearview. 

But what about dilution and its increased level of debt since 2020? That’s a valid point. As my InvestorPlace colleague Ian Bezek argued earlier this month, its enterprise value (market capitalization plus debt) is higher today than it was at the end of 2019. For reference,  at the end of 2019, CCL stock traded around $50 per share, or around 173% above where shares trade today. Dilution and a larger debt position are the reasons for this.

Despite the heavy dilution, earnings could ultimately bounce back in a way that helps justify a sharp move higher for shares. Per a Seeking Alpha commentator, once Carnival resumes profitability, it can put much of this cash flow to work to pay down this increased debt position, in turn reducing interest expense and boosting earnings. This could enable it to get annual earnings back up above $3 per share.

The Bottom Line on CCL Stock

Given its historic 10x-15x earnings multiple, earnings of $3 per share would translate into a move back to between $30 and $45 per share for CCL stock. That’s 63% to 145% above the current price.

That’s not a bad return, but it will take time for this to (possibly) happen. If you’re looking for a quick rebound, you may want to look elsewhere. But if you’re willing to hold onto shares until the comeback takes shape, consider entering a position in CCL stock.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.