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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. Carnival Corp could be worth $25.52, or +26% higher. Shorting out-of-the-money (OTM) puts is one play here.

Carnival Corp stock closed at $20.19 on Friday, May 9, up from a recent low of $16.43 on April 7. I previously discussed how cheap the stock was in April.

(Click on image to enlarge)

Image Source: Barchart - Carnival Corp over the last six months - as of May 9, 2025

Nevertheless, Carnival Corp 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 discuss a way to play it shorting out-of-the-money 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 and a related market valuation using a FCF yield metric.

Forecasting Carnival's Free Cash Flow

Last quarter, Carnival reported positive free cash flow, 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 adjusted FCF metric, as it did not include export credit proceeds.

That was lower than the Q4 adjusted 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 unadjusted FCF margin in Q1 was higher at 5.47% (i.e., $318 million/Q1's $5,810 sales), vs. 5.37% (i.e., $319 million/$5,938 million 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., $1.297 billion/$25.021 billion sales), although on an adjusted basis, including $2.36 billion in export credit proceeds, the 2024 adjusted 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 unadjusted FCF figure to forecast FCF for 2025. For example, assuming makes a 6.7% unadjusted 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 estimate) = $1.743 billion FCF 2025

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

Target Price for Carnival Corp

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., $1.272 billion):

• $1.272 billion/$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:

• $1.743 billion FCF estimate/0.0465 = $37.484 billion target market 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):

• $1.743 billion estimate/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 estimate for 2024 of $1.743 billion. This implies that Carnival Corp 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, Carnival Corp 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 Carnival Corp 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 puts in nearby expiry periods.

Shorting Out-of-the-Money 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 Carnival Corp 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.

Image Source: Barchart - puts expiring June 20 - As of May 9, 2025

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 Carnival Corp 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 the stock will fall. Given Carnival's upside, shorting these two strike prices could be a good way to set a buy-in price for patient investors.

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