If you’re thinking of industries that have been hard hit by the coronavirus, cruise lines are right up there. This pandemic has been a worst-case scenario for Carnival (NYSE:CCL) and other cruise operators. The travel bans would have been bad enough. But on top of that, cruise ships served as a major disease incubator for the coronavirus. Now, for a fair number of potential customers, cruise ships are mentally connected to the worst health crisis in decades. Not surprisingly, CCL stock has plummeted as a result.
In fact, Carnival shares are now down 80% from its 52-week highs. That has brought out the bargain hunters. Traders have bid up CCL stock on several occasions in recent weeks. Each time, people bought Carnival in hopes of imminent funding for the company, either from the government or private investors.
Unfortunately for Carnival, the government bailout option fizzled out, and Carnival was only able to raise funds from private investors at a stiff price. That, combined with the fact that the cruise industry is on pause for months to come, leaves the company in a most difficult position. I know Carnival is a popular turnaround pick. But you can find better options for a recovery in the travel sector; CCL stock is not the best choice for the following reasons.
As of Carnival’s last quarterly report, the company had just half-a-billion dollars of cash on hand. That may sound like a lot, but it’s very little compared to the company’s near-term obligations of more than $4 billion. These are made up accounts payable, short-term debt, and so on.
On top of that, it had more than $4 billion of additional near-term liabilities in the form of “unearned revenues.” That is largely money the company received for future cruises that are now indefinitely delayed. It’s unclear what portion of that Carnival will have to refund to customers and what portion can be taken care of by giving customers vouchers for different cruises in the future once the industry is up and running again. Then you have more long-term debt on top of that looming in the background.
In any case, with billions in hard expenses and billions more in customer deposits to worry about, Carnival’s cash pile wasn’t going to cut it. Hence, the need for a bailout or other form of cash infusion given that the cruise ships are currently not earning meaningful revenue.
Not Deserving of a Bailout
Recently, the government approved a historic economic aid package. It’s a multi-trillion dollar bill that provides relief to individuals, small businesses, and multinational companies, among others. The aerospace sector got plenty of goodies, with the government giving direct aid to the airlines and Boeing (NYSE:BA). Cruise line investors hoped this government assistance would make its way to their corner of the travel industry as well. But, it didn’t.
That’s largely because the cruise ship operators have chosen to incorporate outside the United States. Carnival, for example, incorporated in the nation of Panama even though its operational headquarters is in Florida. Its Panama jurisdiction allowed it to operate under a friendlier tax regime and looser environmental regulations.
Royal Caribbean (NYSE:RCL) chose to incorporate in the West African nation of Liberia. And Norwegian Cruise (NYSE:NCLH), contrary to its name, is based out of Bermuda. As a result of this policy, when the cruise lines went asking Uncle Sam for a bailout, the government decided to withhold assistance.
Deprived of federal aid, the cruise lines have to turn elsewhere for near-term cash. Carnival successfully pulled off a massive fundraising effort last week, as it raised more than $6 billion in a combination of debt and stock offerings.
However, this money came at a high price and proved that the cruise lines will struggle to remain viable without more direct governmental assistance. Just look at the details of how Carnival raised its money.
For one thing, it tried to sell $1.25 billion of stock to the public. And keep in mind that last week, CCL stock traded for as much as $14 per share. In the end, Carnival only managed to sell $500 million of shares, and they did so at just $8 each. That was a huge discount from where the stock traded a few days ago, let alone before the crisis really got going.
The company raised far more money from the debt market. However, the terms here weren’t great either. The company raised $4 billion in senior loans at a punishing 11.5% interest rate. That alone will add nearly half a billion dollars a year of interest expenses to Carnival’s operations. Even worse, the bonds are due in 2023, meaning that Carnival only has a couple of years to get its operations back on track before it owes the principal on that $4 billion.
It also issued $1.75 billion in convertible bonds at a 5.75% interest rate. That’s a much better price, but the conversion feature will dilute shareholders in the event that Carnival stock manages to rally significantly.
The Verdict on CCL Stock
In the short-term, Carnival stock should offer up plenty more trading opportunities. Shares rallied sharply Monday, for example, on news that the Kingdom of Saudi Arabia has taken a meaningful stake in the company. Announcements like that, or any hopes of a subsequent governmental relief package that helps the cruise lines could give CCL a huge boost.
For that reason, it’s scary to bet against Carnival after such a big fall. If you want to bet against the cruise line stocks, Royal Caribbean or Norwegian seem like better trades as their balance sheets are flimsier.
That said, it’s hard to make a strong argument for owning CCL stock either. Over the long-term, the cruise ship industry is fundamentally broken. It will take years for demand to come back to previous levels. And given Carnival’s high debt load and operating costs, they don’t realistically have years to muddle through this. In the short run, anything is possible. With time though, expect Carnival shares to keep on sinking.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.