Carnival Corp. (CCL -2.26%) stock dropped 11% in July, according to data provided by S&P Global Market Intelligence. It was negatively affected by overall macroeconomic events and investor sentiment, but there wasn't any news specific to the cruise industry leader.
Demonstrating why it's a leader
Carnival was a reliable market-beating stock before the pandemic, with steady increases in revenue and profits over many years. It also paid a growing dividend.
That all changed when it shut down for the pandemic. But did it really? Carnival's stock tanked when it paused operations, but it's made an incredible comeback. Revenue and demand are at record levels, and profitability is improving. It's likely to look like it used to, or even better, very soon.
The one major change on Carnival's financial statements at this point is its high debt. I'm not playing that down; it's a huge issue, and every investor should know about it and understand what it means. Even if a company is making high sales and has happy customers, if it can't pay off its debts, it won't stick around for too long.
However, Carnival is the leading global cruise operator, and it's demonstrating strong management skills that are getting it back up to speed. It's generating higher operating cash flow and free cash flow that's outpacing interest on debt, and it's paying off the debt in a deliberate manner, sending off the higher-interest pieces while paying down the principle.
Speeding up or slowing down?
There have been mixed indications on Wall Street as to what's going on in the economy, and that's weighing on many stocks, especially ones like Carnival that already come with elevated risk. In general, these key pieces of information wouldn't cause the stock market to soar or tumble, but in these times of turbulence, good news and bad news can send the market to extremes. When they happen almost simultaneously, there's a lot of volatility.
Carnival stock had been rising for most of July after a well-received quarterly report in June and signals that the Federal Reserve could cut interest rates in September. But things turned around drastically after a confluence of negative signals, including pressure in the restaurant and retail industries, a higher unemployment rate, and expected pullbacks in consumer spending. All of these factors impact Carnival indirectly, and movements in the stock price are more about fear or confidence than hard data. Carnival stock's drop has continued into August and was exacerbated by the market's free fall Monday morning. It hasn't yet recovered.
However, there was mostly good news in its most recent quarterly report. It's going to take more time, but Carnival has excellent prospects and remains a strong long-term pick.
