Carnival Corporation (NYSE:CCL) is a company that’s faced disaster before and come back stronger than ever. From the sinking of its Costa Concordia ship in 2012 to the 2013 “poop cruise” of the Carnival Triumph to the December 2019 collision between two Carnival ships in Cozumel, CCL stock has always recovered.
But the novel coronavirus is a disaster on another scale altogether. It’s knocked Carnival stock back 75% so far this year. Has that crash created a buying opportunity?
Cruise Lines Are in Trouble, With No Government Lifeline
Travel industries from airlines to online booking sites are in trouble as a result of the coronavirus pandemic. However, none of these is being hit quite so hard as the cruise industry. Christopher Muller is a senior professor at Boston University’s School of Hospitality Administration. He describes a bleak situation for companies like Carnival Cruise:
“This will be a disastrous time for the industry. When you have 3,500 people booked on one of these mega cruises and the boat doesn’t go, it’s an enormous expense. Someone’s paying for that boat that’s sitting idle in the harbor and it’s very hard to recapture those ongoing fixed-cost losses. Airlines have much smaller capacity vehicles, so while grounding a 150- or even 400-seat airplane is expensive, they can react much quicker.”
Carnival has cancelled all cruises through May 11, and last week it announced some routes would be shut down until November.
The company says it needs $1 billion per month to survive. It’s raised $6 billion in stock and debt to help it survive until its cruises resume. However, it probably won’t receive assistance from the government. By setting up offshore operations to avoid paying U.S. taxes, cruise lines — including Carnival — made themselves ineligible for funds from the $2 trillion coronavirus stimulus package.
How Is Carnival Faring Compared to Other Cruise Lines?
The situation started to go downhill for cruise line stocks by mid-January. At that point, the coronavirus was running rampant in China. With that country accounting for roughly 5% of the global cruise market and companies cancelling cruises, investors were beginning to get nervous. As we all know, things subsequently deteriorated quickly for the sector. Norwegian Cruise Line (NYSE:NCLH) is down 76% this year, while Royal Caribbean (NYSE:RCL) has lost 68% of its value in 2020.
So the cruise industry in general is hurting. Carnival isn’t alone, but that’s not much consolation — especially when governments are reluctant to help the industry.
Could the Sector Recover?
Professor Muller makes the point that cruise lines will have a huge image problem to overcome:
“They’ll highlight the things you can do that you can’t do anywhere else, the luxury of this floating hotel going from place to place. But look at that ship off Oakland. If you’re stuck in your cabin, it’s a zombie prison, and that’s the perception [of cruising] right now.”
Despite that considerable obstacle, he thinks that deep discounts will go a long way toward overcoming passenger reluctance to go back to taking cruises.
The question is: will cruise lines like Carnival survive in the meantime?
The Bottom Line on CCL Stock
Carnival’s stock has been downgraded by multiple investment firms over the past several weeks. On Mar. 23, Wells Fargo revised its rating for CCL stock to “underperform,” with a 12-month price target of just $6.
Maybe cruising will bounce back in 2021, and Carnival’s stock will recover from yet another disaster, paying off handsomely for those who invested in it now. Maybe the cruise industry will never recover from the coronavirus. It really could go either way. An investment in Carnival stock is a gamble that may be even riskier than cannabis stocks at this point.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.