Carnival Is Still Down 18% This Year: Did Today Just Mark the Bottom?

A quarterly beat on both earnings and revenue is sending Carnival (NYSE:CCL | CCL Price Prediction) stock sharply higher, yet the cruise operator’s share price remains deep in the red for the year. Carnival stock is up 14% to $25.17 as trading continues, a jump that still leaves Carnival shares down 18% year to date (YTD). That combination puts a fair question in front of anyone following Carnival: is this rally the start of a floor or a bright spot in a weak year?

Fuel ranks among a cruise operator’s largest costs, and energy stocks have climbed sharply over the same stretch that cruise names fell. The Energy Select Sector SPDR ETF (NYSEARCA:XLE) is up 40% YTD, a rise that describes part of the pressure Carnival and its peers have been under. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY), meanwhile, is up 12% YTD, leaving Carnival well behind the broad market as well.

Across the cruise group, the damage this year has been uneven. Shares of Royal Caribbean Group (NYSE:RCL) are down 6% YTD to $259.17, a far milder decline than Carnival stock has posted. At the other end of the range, Norwegian Cruise Line Holdings (NYSE:NCLH) stock is down 34% YTD to $14.82, the steepest slide of the three.

Record Deposits Headline a Clean Beat

Carnival’s latest quarterly report beat Wall Street expectations on both earnings and revenue, delivering a clean result from a company whose stock had been drifting lower all year. In that report, Carnival stated that customer deposits reached a record $7.6 billion. That deposit total measures money customers have already committed to future sailings, which makes it a direct gauge of forward demand.

A beat on past results can fade quickly, while a Carnival deposit record points to trips customers have already paid toward, and the bull case builds on that difference since Carnival stock came into the report down sharply for the year and priced for something weaker than what the company delivered. A move this large in Carnival shares suggests the market is repricing the stock toward that stronger forward picture.

Royal Caribbean and Norwegian Frame the Spread

Royal Caribbean stock has held up far better than Carnival shares this year, a sign the market had already separated the steadier cruise names from the weaker ones, and the rally in Carnival shares narrows the distance between the two, though Carnival stock remains the weaker performer on a YTD basis. That spread leaves Carnival room to keep closing ground if the deposit story holds, which is a central part of the bull case.

Norwegian stock posts the deepest decline in the group, and that slide tempers any read that the entire sector has found its footing. Fuel costs weigh on Norwegian, Royal Caribbean and Carnival alike, and the energy fund’s rise this year shows how much that pressure has built across the industry. Carnival’s record deposits arrived with that cost pressure still in place, so the bear case can argue that one quarter leaves the underlying squeeze untouched.

A Floor or the Best Day of a Poor Year?

It’s too early to call one strong rally a confirmed bottom for Carnival stock. The bull case rests on a record deposit figure, a beat on both earnings and revenue, and Carnival shares that entered the report priced for a weaker outcome. Against that, the bear case points to Carnival’s YTD decline. It remains in place, along with the deeper slide in Norwegian stock and energy costs that have risen sharply across the same stretch.

Carnival shareholders can weigh whether this move looks more like a floor forming or simply the best day of a poor year, and the answer may take more than one quarter to determine. Investors should watch for Carnival shares holding their gains after the report, since follow-through would strengthen the floor argument. A fade in Carnival stock back toward its prior range would hand the argument to the bear case.

Given that uncertainty, investors interested in Carnival stock should keep their positions moderate, since a stock that has swung this hard can give back gains quickly. Building a Carnival share stake in stages lets the next quarterly report test the deposit story before stockholders expand their allocation. Combining that approach with a firm cap on their exposure to Royal Caribbean, Norwegian and the rest of the cruise group can help contain the damage if fuel costs keep climbing.

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