Carnival is buying its shares. Moody's is still waiting

The argument in brief

The best summer in Carnival’s history left the shares lower than in August.

Q3 net yield, constant currency

+2.4% (guide +1.2%)

Q3 fuel per metric ton, against what Brent explains

$826 (+19%)

Shares bought back, March to 28 Sep

c. $1.2bn

Net debt / EBITDA, firm basis

3.1x (flat in Q3)

EV / EBITDA, Carnival / Royal Caribbean

8.0x / 14.1x

CCL, 7 Oct 2026

$26.15 (−4% since Aug)

Spider Eyes Research is long Carnival, as it was in August.

The August note argued that the operating recovery was priced in and the credit re-rating was not. Q3 helped the first half of that and did nothing for the second. Operations beat the guide. The multiple did not move, the firm has found no Moody’s action since July, and leverage stopped falling for the first time this year.

Carnival is buying back its own shares. In Q3 that, with the dividend, used more cash than the business produced. The question for the next six months is which comes first: Moody’s investment grade, or another quarter of standing still.

The firm’s base case, set out in the valuation section, prices the re-rating. It holds only if Moody’s follows S&P and Fitch within the next year. Without the re-rating, the firm’s cash-flow check sits a little below today’s price, and that answer rests on judgement inputs.

At Royal Caribbean the multiple moved most in the quarter the third agency, Moody’s, crossed, though its own results landed then too. Carnival is at two of three. That is why Moody’s appears on both sides of the table.

The August note, marked

Ten calls from August, one print later. The business did better than August feared. The credit story stood still.

Did the summer hold up?

Yes, and by more than August expected.

August read June’s guidance as a slowdown: Q3 net yields guided up 1.2%, against 2.2% in Q2. Q3 came in at +2.4%. Costs excluding fuel rose 1.8% against a guided 2.8%. Carnival raised its full-year net yield guidance in constant currency from about 1.75% to 2.3%, which recovers about half of the cut August flagged.

The forward book carries the same message. Management says 2027 is half booked, at higher occupancy and prices than 2026, and that 2028 is ahead on both. Customer deposits reached $7.6bn, a record for a third quarter and about 7% higher on flat capacity. The first quarter of 2027 still carries some of the spring disruption, and a change in loyalty-programme accounting will take 0.4 points off FY2027 yields without changing cash.

Two cautions. North American ticket prices fell in the quarter, by $40m, while Europe’s rose. Management says to judge on total revenue, because bundled packages move spending between ticket and onboard, and North American onboard revenue rose 7.3%. The other caution is the Caribbean. Asked about capacity there, the chief executive cited something like 37% growth over the three years to 2027, and agreed the region feels pressure when that much arrives at once.

Did the fuel bill come down?

No. It came in above the guide, and the guide was already high.

August said the Q3 print would settle the fuel question. It did: Carnival paid $826 a metric ton in Q3, against a guided $812.

The useful comparison is with what Brent explains. Over the seven quarters before the Gulf conflict, Carnival’s fuel cost tracked front-month Brent futures closely. On that relationship, Q3’s Brent implied about $693 a ton. Carnival paid 19% more, or 21% more on the version of the relationship August used. On this refit Q2 sat almost on the line, so the gap opened in Q3, as August said it would.

The Q4 guide of $896 a ton assumes most of that gap persists. At Brent futures of $100, about where they settled on 6 October, the pre-war relationship gives about $777. The guide is about 15% above it, a little less than Q3’s gap. If Q3’s gap holds at today’s futures, Q4 fuel would cost about $925 a ton, above the guide.

Why the gap exists is not settled Speculation. One candidate is physical crude. The spot assessment ran far above futures in the spring, and again on 6 October, at $125 a barrel against $100.58. Before the war the two sat within about $2. But the timing fits only with a lag: the spread was large in Q2, when Carnival’s cost sat on the line, and small in Q3, when the gap opened. The other candidate is the one August named, a squeeze in refined bunker fuel rather than crude. Either way, the futures price is not the thing to watch for the gap closing.

Carnival does not hedge fuel, and management repeated on the call that it does not intend to. It manages the exposure through consumption instead, which fell 3.8% per berth-day in the quarter. Each 10% on the fuel price in Q4 is worth about $59m of adjusted net income, or about 4 cents a share. Royal Caribbean and Norwegian report their own Q3 later in the autumn. Whether the gap is sector-wide is pending their figures.

Where did the cash go?

Carnival is buying back its shares. In Q3, its leverage stopped falling.

The buyback began in March. By 28 September Carnival had bought about 45m shares. In Q3 alone it bought 20.3m at an average $27.03. With the dividend restored at $0.15 a quarter, it will return nearly $2bn to shareholders this year.

Over nine months, most of the spare cash still went to debt. Free cash flow was $3.16bn. Carnival repaid $2.19bn of debt and returned $1.55bn to shareholders. No secured debt remains: S&P’s upgrade in June released the last of the collateral.

Q3 was different. It is the quarter when customer deposits run down from their spring peak, which holds back operating cash. In Q3, for the first time since the buyback began, buybacks and dividends exceeded free cash flow. The debt Carnival repaid came out of cash, so net debt did not move.

On the firm’s basis, leverage fell 0.16x in Q1 and 0.14x in Q2, then rose 0.01x in Q3. A year earlier, before the buyback, Q3 brought a fall of 0.14x, but some of that came from earnings growth. This year trailing earnings were flat, as fuel ate the gain. Without the buyback Q3 would still have shown a small fall, so the buyback explains about half of the swing Speculation. Q4 is the leaner cash quarter still: last year it produced almost no free cash flow. Management expects leverage to improve year on year, and on the nine months it has.

The tension is about order. The August case runs from lower debt, to Moody’s investment grade, to a higher multiple. Carnival is returning capital at the same time as it pays down debt. If Moody’s upgrades anyway, the order cost nothing and each share gained. If leverage stalls again, the buyback is delaying the step the re-rating waits for. On 31 July Moody’s was reported to have kept Carnival one notch below investment grade, with a positive outlook. The firm has found no action since.

What the price leaves room for

Two numbers, two questions. One prices the re-rating. The other asks whether cash flow alone covers today’s price.

The base case, rebuilt

The method is August’s. Royal Caribbean’s EV / EBITDA settled about three turns higher after its own crossing to investment grade, and the firm applies that step-up to Carnival. What changed is the build. August mixed a data provider’s multiple, its own proxy series and company-guided earnings. This review rebuilds every multiple the same way from the filings.

On that basis Royal Caribbean’s step-up is 3.03x, Carnival trades at 8.0x, and the base case is $42.46. Half the step-up gives $34.31. The single-quarter jump Royal Caribbean saw when Moody’s crossed gives $48.18.

Three things about that number. It is up on method, by $2.55, while the share price, results and the buyback together took $0.95 off. Built this way, it is today’s price plus the re-rating, so it moves one-for-one with the share price. And it rests on one precedent. The firm tested that precedent against Norwegian, which stayed below investment grade throughout. In the quarter Royal Caribbean’s multiple jumped, Norwegian’s did not, while the S&P 500 rose 10.6%. So the jump was specific to Royal Caribbean, not the market Speculation. Royal Caribbean’s own results also landed that quarter, so Moody’s cannot be credited alone.

The cash-flow check

The discounted cash flow values Carnival on its own cash generation, with no re-rating: explicit years to FY2030, then growth of 2.25% a year. It gives $24.34, 7% below the share price. August’s was 35% below on guided capex, and 14% below on its normalised version.

The gap narrowed on method:

• beta re-measured over the two years since the pandemic recovery, 1.43 after adjustment against August’s 1.89;
• the tax rate at 1.8%;
• explicit growth years instead of a single heavy-spending one.

Higher rates pushed the other way. The 10-year Treasury yield closed at 5.28% on 7 October, against a July average of 4.6%. The cost of debt is now the Treasury yield plus a judgement spread of 1.25 points; at the book rate August used, the check would land about $30, above the price. The terminal value is 79% of the enterprise value, more than the whole equity value, so this is a cross-check, not a second base case.

What fuel can move

The model’s default lets the fuel premium fade: 15% in FY2027, half that in FY2028, then none. Brent futures start at $100 and ease to $90.

FY2027 EBITDA as modelled (net revenue less adjusted costs and fuel), and DCF value per share. Each Brent path falls $5 in FY2028 and $10 by FY2029.

Read across a row and the premium moves FY2027 EBITDA by about $360m to $420m. Read down a column and a $20 move in futures moves it by about $300m to $360m. Whether the premium closes matters as much as where the oil price goes.

Bear case, then bull case

Where the position stands

The business answered August’s doubts. The credit story is waiting on Moody’s, and on Carnival’s own choices.

What the firm is watching

Moody’s can settle it any day. February can break it.