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Carnival Corporation (CCL) produced strong Q1 revenue gains, positive FCF margins, and an excellent outlook for the rest of the year. CCL stock is well off its highs and could be undervalued. Short-put investors can generate huge income yields.
CCL closed at $20.94 on Friday, March 21 - well off its high of $28.49 on Jan. 30, and up from a recent low of $19.20 on March 11.
Due to its recent strong earnings, CCL stock looks deeply undervalued. I discussed this in a Jan. 12 Barchart article, “Carnival Corp Stock Is Off Its Highs - Worth Buying Now?”
Strong Earnings and Cash Flow
On Friday, March 21, 2025, Carnival released its Q1 results for the quarter ending Feb. 28. Q1 revenue rose 7.5% Y/Y. In addition, earnings were up almost double on an operating income basis.
Moreover, Carnival's free cash flow (FCF) was positive again at $318 million, although down from last quarter's $366 million, as I pointed out in my last article. Nevertheless, its FCF margin (FCF / revenue) was strong at 5.5%.
In addition, management provided strong guidance for the year. Adjusted net income is expected to rise 30% this fiscal year to Nov. 30, 2025. Moreover, Carnival says it expects adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), a cash flow measure, to rise 10% Y/Y.
In effect, management is not expecting a recession, based on its travel forecasts. As a result, sell-side stock analysts continue to have high price targets for CCL stock.
Target Prices
For example, Yahoo! Finance's survey of 29 analysts shows an average price target of $29.14 for CCL. Similarly, Barchart's survey shows a mean price target of $29.00.
In addition, AnaChart.com shows that 19 analysts who have recently written on CCL stock have an average price target of $26.51.
This means that the average survey price target is $28.22. That means they expect an upside of almost 35% from Friday's price:
$28.22 / $20.94 = 1.3477 = +34.8% upside
The problem is there is no way to tell when this will occur. It could take a year or more for the stock to bottom out and rise to its target value.
One way around that for value investors is to sell out-of-the-money (OTM) put options in monthly expiry periods, and repeat the process each month. The reason is that CCL put options have high premiums now and short-sellers can take advantage of the high yields that these offer.
Shorting OTM Puts
For example, look at the April 25, 2025, expiration period, just over one month away (34 days to expiry - DTE). It shows that the $20.00 put option strike price contract has a midpoint premium of 78 cents per put contract.
That means that a short-seller of these puts can make an immediate monthly yield of 3.90% (i.e., $0.78 / $20.00 = 0.0390).
This means an investor who secures $2,000 with their brokerage firm, can enter a trade to “Sell to Open” 1 put contract at $20.00 for April 25 expiration. The account will then immediately receive $78.00 for every contract shorted this way.
Note that this short-put play is 4.5% below the trading close on Friday. When it opens on Monday the price could be substantially different. It's an indication of value. For example, making a monthly 3.9% yield is a great value opportunity. Even if it turns out to be lower when Monday trading starts, that could still potentially be a good play.
Note also that the delta ratio is low at about 35% - indicating just over one-third chance of making a profit on this trade if CCL stock does not fall to $20.00 or lower over the month.
More risk-averse investors can sell short the $19.50 strike price put option. That has a lower yield of 2.71% (i.e., $0.53/$19.50), but the strike price is further out-of-the-money (OTM) - almost 7.0%.
The bottom line is that this is a good way to set a lower buy-in price target. For example, the $19.50 strike price has a breakeven level of $18.97, or 9.4% below today's price. The $20.00 put play has a breakeven of $19.22 (i.e., $20.00 - $0.78), or 8.2% OTM.
Downside Risks
Nevertheless, CCL stock could fall to $20.00 or lower over the next month. That might lead to an unrealized capital loss. That would occur if the account is assigned to buy 100 shares at $20.00 using the collateral secured for the play.
Investors should study these risks and have a game plan in case they occur. One way to do this is to search through the Barchart Options Learning Center tabs, such as the Options Trading Risk tab.
For example, investors could always roll any unprofitable short-put play over to a longer period. Or they could allow an assignment to go through and then sell covered calls in OTM call strike prices. That might help defray any unrealized capital loss, without having to sell to the underlying position. In addition, the investor could continue to short OTM puts.
Moreover, one hedging mechanism is to use some of the premium to buy long puts at lower strike prices (for the same calendar expiration period). That way, if CCL stock completely tanks, at least there is some downside protection. That lowers the overall return for the investor, but it may be worth the peace of mind.
The bottom line is that CCL stock looks undervalued here. If people keep taking cruises, as expected by the company, CCL stock could be a great buy here. One way to set a buy-in target price and get paid while waiting is to sell short OTM put options in monthly expiration periods.
