A cheap FTSE 250 stock to buy and hold for the long term? Count me in!

As capacity ramps up again, can this FTSE 250 cruise operator soon return to profit?

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Sifting through the FTSE 250 usually provides opportunities to invest in high-quality growth stocks. Having looked at the index again, I think I’ve found a cheap stock that could take off in the near future. With that in mind, I’m thinking of adding Carnival (LSE:CCL) shares to my long-term portfolio. Why do I think that this company would be a good addition? Let’s take a closer look.

Recent results

As a major specialist in cruise holidays, Carnival operates throughout North America, Europe, Australia and Asia. 

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During the pandemic, the business was battered as it was unable to run its cruises. The effects can still be seen in its financial results. 

Revenue for the year ended November 2020 was $5.6bn. For the same period in 2021, revenue had fallen further to just $1.9bn.

Between 2020 and 2021, however, losses before tax narrowed slightly from $10.2bn to $9.5bn. This may be the first early indicator that the cruise industry was slowly starting to recover. But it should be noted that any further variants of concern could grind operations to a halt.

These figures are all still well below historical levels. In 2017, for instance, revenue was $17.5bn, while the firm recorded profit before tax of $2.6bn.

This is a reminder that Carnival has a long voyage ahead to reach pre-pandemic levels. 

Calmer seas coming for this cheap FTSE 250 stock?

In results for the three months to 30 November 2021, however, the company reported liquidity of $9.4bn. In addition, it announced that it was operating at about 61% capacity. While this is still relatively low, the business had forecast a full fleet return by spring 2022.

Furthermore, for the three months to 28 February 2022, revenue stood at $1.6bn. This was a vast improvement year on year because revenue was just $26m for the same period in 2021. 

During this time, Carnival also stated it was operating at around 75% capacity.

That said, last December, investment bank Berenberg commented that the cruise sector recovery was taking longer than anticipated, but it maintained its 1,600p price target. With the shares currently trading at 1,366p, down 14% in the past year, I think there may still be significant upside potential as capacity increases.

What’s more, the company may be undervalued. By comparing the firm’s trailing price-to-earnings (P/E) ratio with a major competitor, Royal Caribbean, this may indicate that Carnival shares are cheap. 

Carnival has a trailing P/E ratio of 4.83, while Royal Caribbean has a ratio of 57.31. Based on this comparison, Carnival shares may indeed be a bargain at current levels.

Overall, this undervalued business looks to me to be recovering. While there is still a long way to go, recent data on capacity levels suggests that things are starting to return to normal. I will be buying shares soon.

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Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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