Carnival Corp (CCL) produced positive free cash flow (FCF) last quarter, albeit at a lower level on a trailing 12-month (TTM) basis than in 2024. However, its upcoming results could surprise analysts. 

That is based on analysts' revenue projections and company guidance. CCL could be worth $25.52, or +26% higher. Shorting out-of-the-money (OTM) puts is one play here.

CCL stock closed at $20.19 on Friday, May 9, up from a recent low of $16.43 on April 7. I discussed how cheap the stock was in my April 8 Barchart article, “Carnival Corp Stock Looks Cheap Here - Still a Favorite of Market Analysts.”

Nevertheless, CCL still looks cheap here if we make some projections for 2025 about its free cash flow and a conservative FCF yield metric. This article will delve into its valuation and a way to play it shorting out-of-the-money (OTM) puts.

Carnival's Guidance and Analyst Revenue Forecasts

On March 21, Carnival reported that its fiscal Q1 revenue for the quarter ended Feb. 28 rose almost 7.5% from $5.4 billion last year to $5.81 billion. 

Carnival also provided higher guidance for the year ending Nov. 2025, indicating that its adjusted net income would be 30% higher than in 2024. That is up from the prior quarter's 20% higher net income guidance. It said this was based on “improved revenue and interest expense expectations.”

Moreover, the company expects strong revenue. Carnival's CEO Josh Weinstein said:

  "We are also affirming our December yield guidance for the remainder of 2025, as our booking curve continues to be the farthest out on record, at record prices (in constant currency), onboard spending is robust and we have proven to be incredibly resilient.” 

In December, the company did not give an explicit revenue forecast for 2025. It likes to use a “net yield” metric, a modified gross margin stat. It projected that net yields would be 4.2% higher than in 2024 (constant currency basis), but in Q1, it raised that projection to 4.7% higher.

That seems to imply that revenue could rise by +4.7% from $25.01 billion in 2024 to $26.2 billion. That's exactly what analysts think. For example, Seeking Alpha reports that its survey of 26 analysts shows an average 2026 sales forecast of $26.08 billion (i.e., +4.3%). The same forecast is seen at Yahoo! Finance.

As a result, we can use that forecast to project the company's free cash flow (FCF) and a related market valuation using a FCF yield metric.

Forecasting Carnival's Free Cash Flow (FCF)

Last quarter, Carnival reported positive free cash flow (FCF), albeit lower than the prior year. On page 11 of its earnings release, it said its operating cash flow (OCF) was $925 million and capex spending was $607 million. That means that FCF was positive at $318 million. That was not an adj. FCF metric, as it did not include export credit proceeds.

That was lower than the Q4 adj. FCF figure of $366 million, which included $47 million in export credits. That means its unadjusted Q4 FCF was $319 million, slightly higher than in Q1. 

However, the unadj. FCF margin in Q1 was higher at 5.47% (i.e., $318m/Q1's $5,810 sales), vs. 5.37% (i.e., $319m / $5,938m Q4 sales). For the past year ending Feb. 28, the company generated $1.928 billion in FCF on $25.424 billion of sales. 

That represents a 7.8% margin for the trailing 12 months (TTM). That is higher than the 2024 FCF margin of 5.18% (i.e., $1.297b/$25.021b sales), although on an adj. basis, including $2.36 billion in export credit proceeds, the 2024 adj. FCF of $3.657 billion represented 14.6% of sales.

Since we don't know the export credits amounts for Q1, let's use the unadj. FCF figure to forecast FCF for 2025. For example, assuming makes a 6.7% unadj. FCF margin (midpoint between 7.8% TTM figure and the Q1 5.47% margin), here is the projection for 2025:

  0.067 FCF margin x $26.08 billion (2025 analyst revenue est.) = $1.743 billion FCF 2025

That is 34% higher than the $1.297 billion in unadj. FCF generated in 2024. It's also 37% higher than the annualized Q1 FCF (i.e., $318m x 4 = $1.272 billion). We can use this FCF projection to value CCL stock.

Target Price for CCL

One way to project Carnival's valuation is to use an FCF yield metric. For example, the stock presently has a 4.65% FCF yield if we use its annualized Q1 FCF (i.e., $1.272b):

  $1.272b/$27.355 billion market cap today = 0.0465 = 4.65% FCF yield

So, using this FCF yield, we can estimate its future market cap after applying it to the 2025 FCF estimate:

  $1.743b FCF est./ 0.0465 = $37.484 billion target mkt cap

That is 37% higher than today's market cap. But, just to be conservative, let's use a higher FCF figure of 5.5% (i.e., the same as an 18.2 multiple):

  $1.743b est./ 0.055 = $31.69 billion, i.e., +15.9% higher.

The average of these two is $34.59 billion, or +26.4%, or about 19.8x our FCF est. for 2024 of $1.743 billion. This implies that CCL stock has a value that is 26.5% higher than $20.19:

  $20.19 today x 1.264 = $25.52 per share target

In other words, using 20 multiple for estimated FCF, CCL is worth 26% more at $25.52 per share.

Analysts tend to agree. For example, Yahoo! Finance reports that the average of 30 analysts is $27.55 per share, and Barchart's mean analyst survey price is $27.67. AnaChart.com, which tracks analysts with recent price target recommendations, shows that 20 analysts have an average of $26.51 per share.

The bottom line is that CCL looks undervalued here, based on its FCF estimates, a reasonable FCF yield metric, and using analyst price targets.

There is no guarantee this will happen over the next way. One way to play this is to set a potentially lower buy-in price.  To get paid for this, one can sell short out-of-the-money (OTM) puts in nearby expiry periods.

Shorting OTM Puts

I discussed this in my last article. I suggested shorting the June 20 put option at the $20.00 strike price. That provided a huge premium of $3.50 for a 17.50% yield (i.e., $3.50/$20.00).

The reason was that the put was in-the-money (ITM) as CCL was at $17.06, but the breakeven point was $16.50, still below the trading price). 

Today, the June 20 $20.00 put option has a price of $1.09, which provides a short seller an immediate yield of 5.45% (i.e., $1.09/$20.00). This high yield is for a strike price less than 1.0% below the trading price of $20.19.

However, the $18.91 breakeven point (i.e., $20.00-$1.09) is still 6.33% below $20.19, Friday's close.

More risk-averse investors can “Sell to Open” the $19.00 June 20 put option for 70 cents. This strike price is almost 6% below the Friday close of $20.19, but still has a decent yield of 3.68% (i.e., $0.70/$19.00) over the next 41 days until expiry (DTE). 

Moreover, the breakeven point is $18.30, $1.89 below Friday's close, or 9.36% lower. That provides good downside protection, as seen by its lower delta ratio of 32.5%. It implies less than a one-third chance that CCL will fall to $19.00 by June 20. This is based on its recent historical trading volatility patterns.

The bottom line is that this is a good way to set a lower buy-in price with a nice yield, while waiting to see if CCL stock will fall. Given CCL's upside, shorting these two strike prices could be a good way to set a buy-in price for patient investors.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.