Undeniably, Monday, Mar. 16 was a massacre for most S&P 500 stocks. Carnival (NYSE:CCL) was no exception, losing 17% on the day. On Wednesday trading, CCL stock dropped nearly 27%.
Year-to-date through Wednesday trading, it’s down nearly 82% (including dividends) with an unbelievable 21.5% yield. Before you jump on this badly beaten-down stock, you might want to look to the past to consider whether it’s worth trying to catch this falling knife.
Over the past 20 years, on an adjusted basis, Carnival stock traded under $15 on four other occasions: January-February 2009, February 2003, September-October 2001, and June-August 2000.
To simplify things, not to mention keeping some distance in terms of time, I’ll look back at 2009 and 2003 to see if there were any similarities between those two declines and the one Carnival shareholders are facing today.
Who can forget the Great Recession and the market correction that followed it? By March 2009, the market sellers were exhausted, and we went on a lengthy 11-year bull run that ended Mar. 11.
How was Carnival looking in early 2009 from a financial perspective?
Carnival’s fiscal year is at the end of November. In 2008, it reported revenues of $14.6 billion, 12.3% higher than a year earlier. On the bottom line, it had net income of $2.3 billion, 3.3% lower than in fiscal 2007.
There’s nothing terrible about those numbers. That’s especially true given fuel expenses increased by 62% that year. The fuel cost per ton went from $361 to $558, 55% higher than a year earlier. Thanks to excellent cost controls and a 2.4% increase in net revenue yields — the equivalent of a hotel’s revenue per available room — it was able to maintain profitability.
That’s good news.
However, on a constant dollar basis, it was projecting net revenue yields in fiscal 2009 of -6% to -10% due to deteriorating economic conditions. It reported fourth-quarter 2009 results in December 2009. Its net revenue yields declined by 13.6% to $168.94 from $195.46 a year earlier.
Clearly, the economy was still affecting the cruise industry. Yet, its stock gained approximately 67% between its January/February lows and its December 2009 prices. The market was coming back, dragging CCL stock kicking and screaming.
As for the balance sheet, it finished fiscal 2009 with $8.6 billion in net debt or 45.5% of its $18.9 billion market capitalization at the time.
The company’s financial situation changed dramatically in 2003 when it acquired P&O Princess Cruise Lines for $7.3 billion in stock and the assumption of $800 million in debt. In buying the owners of Princess Cruises, Carnival overtook Royal Caribbean (NYSE:RCL) as the world’s largest operator of cruise ships.
Carnival finished fiscal 2003 with revenue of $7.6 billion, 54.0% higher than a year earlier. On the bottom line, it had a net profit of $1.2 billion, 8.8% lower than a year earlier. From a balance sheet perspective, Carnival had net debt of $5.8 billion or 31.7% of its $18.3 billion market capitalization in February 2003.
So, in both instances, its net debt remained under 50% of its market cap. As for fuel, Carnival spent $390 million in 2003, or 5.1% of its operating expenses.
The Bottom Line on CCL Stock
As you might remember, 2000 was the year of the dot-com bubble, when the Nasdaq reached a peak of 5,048.62 in March of that year, only to fall to 1,114.11 by Oct. 9, 2002. It lost 78% of its value in 30 months.
By February 2003, stocks were starting to make another run. The same can be said about stocks in January and February 2009.
In 2020, and even into 2021, we could be in for an extended period of declining stock prices due to the inevitable recession that’s coming our way.
CCL had $9.2 billion in net debt at the end of November 2019, which represents 96.5% of its current market cap. With no assurances that business will come back once the coronavirus has been eradicated, I have to wonder if $9 is a buy despite the massive stock losses in 2020.
If you haven’t sold CCL stock, I would ride it out. If you haven’t bought, I would wait. There’s a good chance it could go lower.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.