Mizuho analyst Ben Chaiken initiated coverage on the shares of Carnival Corp (NYSE:CCL) with a Buy rating and a price target of $21.

During the COVID shutdown, Carnival sold almost 20% of its fleet, much of which was significantly lower margin, said the analyst.

The analyst estimated the remaining fleet generated 5x the EBITDA/Available Lower Berth Day (ALBD) versus the sold assets, setting the stage for a powerful earnings story once CCL fully returns to operation.

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After the transactions, in FY23, CCL announced a long-term earnings outlook suggesting about $6.8 billion in EBITDA by 2026, which the analyst thinks is achievable and potentially beatable.

With EBITDA being boosted, and Capex requirements declining, the analyst noted CCL’s free cash flow profile is inflecting dramatically, particularly in ’25 and ’26.

Carnival could generate $6 billion in FCF over the next three years, or 25% of its market cap, noted the analyst.

Thus the analyst sees upside to estimates through the company’s asset sale transformation, benefiting margins and future earnings growth, relative to expectations.

The analyst’s thesis is also based on the valuation discount to Norwegian Cruise Line Holdings Ltd (NYSE: NCLH) and accelerating FCF primarily as capex requirements drop off significantly in 2025 and 2026.

Carnival has recently made two announcements that the analyst views favorably for future yield growth, which is the development of a pier at Half Moon Cay and the construction of Celebration Key, the largest and closest exclusive destination in CCL’s portfolio.

Price Action: CCL shares are trading lower by 0.12% at $17.09 on the last check Tuesday.

Image: Ed Junkins from Pixabay