Carnival Corporation & plc (NYSE:CCL) is making progress in recovering from the significant debt it accumulated during the pandemic. The company’s management has developed a plan to address its debt load and is optimistic about returning to profitability in the third quarter.

CCL stock has experienced a notable increase of 113% since May, driven by tailwinds from the summer season and strong bookings in the first two quarters. However, it’s important to note that Carnival faces competition from other cruise lines that are also recovering. Despite this, considering the positive outlook for the year, there is potential for Carnival to surpass its Q3 earnings per share (EPS) forecast, which management expects to be between $0.70 and $0.77.

Historically, summer has been Carnival’s best season. Last year, the company’s revenues nearly doubled from Q2 to Q3, reaching $4.3 billion. With the current trend of increased bookings and ticket prices, Carnival could have its most successful quarter ever in terms of revenues. The company reported $4.9 billion in revenue in its latest earnings, and it expects a similar quarter-over-quarter increase in Q3.

Although a strong Q3 performance would be a catalyst for Carnival, it doesn’t guarantee smooth sailing for the company. Risks include the substantial debt burden, competition from other cruise lines, as well as potential fluctuations in oil prices and foreign currency values.

Carnival’s debt repayment strategy includes paying off $2 billion of near-term debt by the end of the year. The company has made significant strides, achieving positive operating income and cash flow from operations in Q2. Carnival expects to maintain positive cash flow for the remainder of the year and generate an average of $5 billion in free cash flow over the next three years. A portion of this cash flow will be allocated towards debt repayment, aiming to reduce debt by $8 billion through 2026.

However, it’s worth noting that Carnival’s current ratio is .64, indicating a potential challenge in covering current or short-term liabilities. Additionally, the interest coverage ratio of -1.72 suggests that the company’s interest expenses are a burden. In Q2 2023, Carnival’s interest expenses totaled $542 million, while it reported a net loss of $407 million.

One market that could have a positive impact on Carnival is Asia, particularly China. The loss of the Chinese market over the past three years has been a significant blow to Carnival. However, as China normalizes, there may be a surge in ticket sales and onboard spending for cruise lines. Although Carnival has no immediate plans to re-enter China, it may reconsider in the future.

Carnival also faces competition from Royal Caribbean Cruises and Norwegian Cruise Line, both of which offer more extensive cabin and suite options. While Carnival dominates the European market, its competitors are experiencing growth in the North American market, surpassing their 2019 quarterly revenues in the region. Royal Caribbean plans to return to China in 2024, which could put Carnival at a disadvantage.

Several risks could impact Carnival’s operations, including fluctuations in fuel prices, higher interest rates affecting customer discretionary spending, and geopolitical conflicts. These factors could impact Carnival’s debt situation, which is currently the company’s biggest risk. Additionally, foreign currency fluctuations pose a risk since a significant portion of Carnival’s revenue is generated outside the United States.

From a technical analysis perspective, CCL stock has recently broken out of a long-term downward channel, signaling a bullish trend. However, the stock is currently overbought, and a pullback and retest of support levels may present a better entry point for investors.

Carnival Corporation is on a path to recovery, with positive cash flow and a potential return to profitability in Q3. The company’s debt repayment strategy and positive outlook for the year are encouraging. However, investors should be mindful of the risks associated with the industry, such as competition and external factors affecting operations. Overall, given the positive trajectory, the potential for exceeding EPS expectations, and the technical analysis, Carnival receives a buy rating.