Carnival

Carnival's third-quarter net yield growth of 2.4% and adjusted net cruise cost growth of 6.3%, rendered adjusted EPS of $1.43, ahead of the firm's $1.35 guidance. Carnival lifted its 2026 outlook to include yield growth of 3.8% (from 3.2% prior), cost growth of 3.5% (3.7%), and EPS of $2.24 ($2.22).

Why it matters: Demand trends indicate that interest in cruising remains strong despite weak consumer sentiment hurt by continued inflationary pressures and a volatile geopolitical environment. In fact, the firm noted that it was already 50% booked for 2027 at record occupancy and pricing levels. Carnival is experiencing a solid start to 2028, with higher occupancy and prices than last year. The willingness to cruise underlies customer deposits of $7.6 billion, a high-water mark, despite no capacity growth over the next 12 months.

The bottom line: We plan to hold our $35 per-share fair value estimate for narrow-moat Carnival, and view shares as attractive, even after a 13% post-print jump. We think shares have languished in recent weeks on concern that discretionary spending softness would imminently bleed into cruising. We view the incremental $150 million-plus in adjusted net income upside relative to prior guidance as impressive (stemming from better yields, costs, and consumption trends). Operational excellence was paramount in offsetting a $150 million impact from higher fuel prices. If Carnival holds cost growth under 2.5% over the next few years, we think it will come close to its 2029 Propel initiative targets of 16% return on invested capital and $3.40 in EPS (we forecast 13% and $3.37, respectively). We think it will easily surpass its 2.75 times debt to adjusted EBITDA goal.

Between the lines: Carnival continues to deleverage and recently redeemed $500 million of debt to return to an unsecured borrower status. It has lowered its debt service costs by 40% since 2023 and freed up capital for share buybacks ($1.2 billion year to date) and dividends.

We are maintaining our $35 fair value estimate per share for Carnival after refining our 2026 outlook to reflect better pricing in the final quarter of the year despite elevated geopolitical risk in the Middle East. Carnival's third-quarter results, which included 2.4% net yield and 1.7% adjusted net cruise cost (excluding fuel), were both ahead of the firm's prior guidance and reflected current currency growth. With customer demand stabilizing after the initial conflict with Iran caused caution, Carnival updated its previous 2026 forecast, calling for full-year current-currency yield growth of 3.8% (up from 3.2%) and cost growth excluding fuel of 3.5% (down from 3.7%), leading to $2.24 in EPS (up two pennies). Altogether, our model changes should result in pricing of roughly $218 per day, setting another record for Carnival. Solid pricing and cost controls put the firm on track to generate around $74 in EBITDA per available lower berth day in 2026, ahead of its previous 2026 goal of $68.60. Additionally, fiscal 2027 is poised to maintain demand momentum, with around 50% of capacity already booked, insulating the risk to near-term pricing.

Our estimates include as reported 2026 yield growth of 3.8% (versus 3.2% prior) and an adjusted fuel costs excluding fuel increase of 3.5% (3.7% prior), resulting in adjusted EPS of $2.26. Our 2026 projection is bound by the higher costs Carnival is set to encounter as it rolls out its new loyalty program, further invests in the destination portfolio, and funds additional drydocks. However, our long-term estimates for Carnival remain unchanged with yield consistently outpacing cost growth. We continue to incorporate ongoing momentum in pricing given consumer interest for the cruise product, which has surfaced in $7 billion in customer deposits on hand.

Cruisers are still showing a robust appetite for travel, and consumers continue to seek experiences that provide value. As demand normalizes over the longer term, we think pricing could grow at a low-single-digit clip (averaging around 3% between 2026 and 2035) as willingness to gather socially remains. We see total costs rising around 2.7% on average over the next decade, skewed higher by fuel price increases in 2026.

With the industry utilization optimized, opportunities to improve Carnival's operating margins should surface; this includes increased scale, improved brand awareness via tactical marketing spending, and better profitability as a result of mix (with numerous underperforming ships sold or scrapped since the beginning of the pandemic and newer more efficient ships coming online), which should increase adjusted EBITDA margins to around 28% at the end of our forecast. This is slightly ahead of the 27% EBITDA average the company achieved over the five years ending 2019.

Carnival has generated ROICs, including goodwill, around our weighted average cost of capital assumption of 9% between 2016 and 2019, thanks to improving brand equity, the expansion of the yield management platform (to facilitate strategic pricing), and strict cost containment. After dipping during the pandemic, ROICs again surpassed our WACC (which doesn't include export credit rates) in 2025.

We rate Carnival with a narrow Morningstar Economic Moat Rating, stemming from efficient scale and brand intangible assets. We had taken our moat rating to none during covid, given the uncertainty around the duration of lockdowns and the impact to ROICs. However, recent performance, along with our projected outlook, indicates that ROICs including goodwill should prove even better than the prepandemic period over our forecast, reaching 20% at the end of our forecast versus 9% in 2019 (when the firm previously held a narrow moat rating) and above our 10% weighted average cost of capital estimate.

To start, we think efficient scale is a key moat source, which has often been evident in highly capital-intensive industries like the cruise industry. This is attributable to the cost of ships (which can run north of $1 billion for new builds), elevating the capital requirements of operators, and the high fixed costs attributable to the business (we estimate more than two thirds of costs are fixed in the short run).

Additionally, we believe there are barriers to entry lending to an efficient scale moat source. In our view, new entrants are unlikely to have access to the cheap financing through export credit facilities at similarly competitive pricing, making the cost of ship builds prohibitive. Export credit agencies, or ECAs, offer loans, guarantees, and insurance to help local shipbuilders limit the risk of selling goods and services abroad, lowering interest costs. For example, Carnival pays 3% or less on most of its ship financing; smaller players tend to paying higher rates on ship financing, crimping near-term returns. In addition to special financing for those working with shipyards, there is limited global shipbuilding capacity, making the ramp of a sizable new fleet difficult.

Further evidence of efficient scale stems from sunk costs and historical precedent. As proof of the deep pockets required to facilitate capacity and passenger growth, Carnival already had invested $43 billion in net property, plant, and equipment, or PP&E, as represented on its balance sheet as of August 2026, with ships representing the majority. Also, with regard to new entrants, our methodology indicates that if a market has seen little entry or exit over an extended period, efficient scale is more likely to be present, which has characterized the cruise industry over a multiyear horizon. Buoying our stance on efficient scale underpinning its narrow moat, Carnival represented 44% of global market share in 2016, and it still holds around 32% market share now—even after scrapping or selling roughly 30 ships since the pandemic. We see little to suggest a change in its position going forward given earlier mentioned constraints.

We think this is supported by a brand intangible asset edge, primarily evidenced by pricing power, industry concentration, and risk aversion that educates purchasing decisions. Pricing power has been exhibited more consistently among the cruise operators over the last decade. Carnival surpassed prepandemic pricing in 2024 by 10%, and reached all-time highs in 2025. The five-year turnaround in pricing was much faster than the prior industry downturn—by 2019, Carnival had still not returned to 2008 prices, despite 11 years passing. Moreover, we think Carnival should be able to grow pricing by around 3% annually over our forecast, above the 2.4% average inflation that Morningstar is projecting for inflation growth between 2026-30.

We believe this is a byproduct of better revenue management systems, more dynamic pricing, and enhanced marketing processes. And, from a sourcing perspective, Carnival is positioned to take advantage of global demand to maximize price by focusing on consumer geographies with the healthiest appetite for travel. The firm has a high percentage of passengers from outside North America, at 40%, thanks to the localized branding Carnival’s product lines offer (for example, Costa in Italy). This allows Carnival to reallocate ships to the markets that have passengers with the most resilient spending patterns at any given time.

Furthermore, we believe that shying away from discounting and focusing on marketing has brought a more rational line of thought to pricing across the industry in recent years. Strategic marketing highlights the firm’s idiosyncratic offerings, clearly conveying that booking early is the best strategy for optimizing cabin and price selection. Additionally, to prevent pricing pressure during times of waning demand, the company toggles its strategy to add sweeteners (spa credits, for example) to the product package to entice consumers to come on board, optically holding its total price firm. Utilizing this bundling mechanism helps set consumer expectations on pricing—without systemic discounting, it is unlikely for pricing to be as volatile as in the past.

Given the percentage of repeat travelers in cruising and the aversion of travelers to trying another brand with a different experience, we believe stickiness exists for those that have already traveled satisfactorily on one of the existing cruise brands. For comparison, hotel operator chains get around 50% of room nights booked by loyalty members on average, below the 55% repeat customers we estimate at Carnival. This is evidenced by the leading market share Carnival has held (by berths). And we don’t expect market leadership to change significantly over the decade ahead, given the fixed order book. We surmise Carnival will continue to drive relevance through its investments aimed at elevating the brands by enhancing the product while in dry dock and elevating its destination experiences. Success has been evidenced by the solid performance of recently refurbished ships that have been put back into existing markets, garnering improved yields (often a high-single-digit or more above than existing hardware) versus pre-dry dock performance and the rising number of visitors to its private islands.

As Carnival faces controlled capacity growth (supply) over the next few years, yields could rise at a faster pace than we currently anticipate.

A more efficient fleet composition (after pruning a whopping 26 ships between 2020-22) and stringent expense controls may benefit the cost structure to a greater degree than expected.

Despite a temporary pause in Asia-Pacific, the potential for a return to the market remains promising, as the four largest operators had capacity for nearly 4 million passengers in early 2020, signaling an opportunity for long-term growth.

The media accessing negative experience commentary regarding cruise incidents could weigh on Carnival's brand image and pricing leverage, making new cruisers hesitant to try cruising. A decrease in new cruisers leads to fewer repeat cruisers.

Higher commodity prices, particularly in energy, could affect profits, which may be aggravated by compliance with evolving global guidelines and EU emissions taxes.

New covid variants, the reinstitution of no-sail orders, geopolitical concerns, or border closures could further pressure profits, which could act as a drag on liquidity.