I don’t believe that recent trading is anything more than a dead cat bounce. Carnival obviously is going to take an enormous financial hit from the novel coronavirus. Debt remains a concern, and the U.S. federal government is not riding to the rescue.
To be sure, I’ve repeatedly counseled investors to stay calm amidst this panic. It’s always important for investors to take the long view. It’s never more important to do so than during a crisis.
The problem with CCL stock at the moment is that my advice doesn’t necessarily help the bull case. Many businesses will recover quickly once life begins to return to normal. I don’t believe the cruise business is one of them.
That’s the point I made last month, when CCL stock traded above $21. Even slightly above $13, I’m skeptical it’s cheap enough.
No Bailout for CCL Stock
There was some speculation that cruise lines like Carnival, Royal Caribbean (NYSE:RCL) and Norwegian Cruise Lines (NYSE:NCLH) might be a part of the recently passed stimulus package. President Donald Trump even said last weekend, “We can’t let the cruise lines go out of business.”
But the hopes for federal funding appear dashed. The cruise operators don’t qualify because they’re not companies domiciled in the U.S. Carnival Corporation is incorporated in Panama, while Carnival PLC is based in England and Wales. The two companies operate as a “dual-listed company,” which is why Carnival trades under two tickers.
Most Carnival ships fly under the Panamanian flag. Those moves largely are made to exempt the company from U.S. taxes, a key reason why many opposed a bailout funded by American taxpayers.
The lack of a bailout doesn’t necessarily mean that Carnival and other cruise operators are going bankrupt immediately. Carnival’s CEO Arnold Donald said in an interview that the company doesn’t need cash, but that “a loan guarantee would be helpful.”
It’s clear investors didn’t agree. CCL stock dropped once the stimulus bill was passed.
Carnival Looks to Raise More Capital
In a sense, Donald was correct. Without that loan guarantee, Carnival had to go to the open market to raise capital. The terms of those raises show how helpful government backing would have been.
Carnival intends to sell over $1.3 billion in stock. Those sales haven’t been priced yet, but no doubt will dilute existing shareholders likely by 15% or more, given Carnival will have to sell well over 10% of the company at a discount to the current share price.
The cruise operator is looking to raise another $6 billion in debt. Incredibly, according to Bloomberg, bankers are floating an interest rate of 12.5%.
The 10-year U.S. Treasury bond is yielding less than 1% right now. That interest rate alone shows how risky Carnival is at the moment. Bonds that are senior to CCL stock still require double-digit yields.
Why That’s a Problem
What’s worrisome about the $7 billion-plus Carnival is looking to raise is that the company doesn’t need the cash to get through 2020. The company said in its first-quarter earnings report that it has nearly $12 billion in “liquidity.” That includes $3 billion in cash the company raised through a revolving credit facility.
Those funds should be more than enough to get the company through this year. Cash operating expenses last year exceeded $15 billion. But, obviously, those expenses are going to come down markedly as the company has canceled all of its sailings.
Carnival still is going to burn cash on salaries, docking fees and other miscellaneous costs. And what cruises have gone out this year no doubt were operated at a loss. $12 billion would seem to easily cover those expenses, however.
Yet Carnival is looking to raise another $7 billion — at least.
That’s because the company itself believes demand isn’t just going to bounce back. And so cash burn isn’t going to end when this current crisis does.
Meanwhile, Carnival has has committed to spend over $11 billion on new ships over the next three years as well. Those ships aren’t going to get filled. But they will soak up at least some of the $12 billion in current liquidity and the extra billions Carnival plans to raise.
Put another way, years of pain are ahead. The situation for Carnival and its peers is more dire than that of major airlines. American Airlines (NASDAQ:AAL) has over $7 billion in liquidity — but American, too, will need short-term help. At least American has some federal backing — and the potential for a quick rebound in demand.
Long-Term Concerns for CCL Stock
Despite the pessimism, I do believe Carnival will survive in the short term. But the long-term case is cloudier.
After all, it’s not like Carnival was performing all that well before this crisis. At the end of 2019, CCL stock traded lower than it had 15 years earlier. Adjusted earnings per share grew just 3% year-over-year in fiscal 2019. Return-on-capital figures are not terribly impressive.
Millennials don’t seem particularly interested in cruises, which provides a potential long-term headwind. It’s hard to imagine more negative publicity for an industry than the multi-week quarantines and tragic deaths that marked the 2020 sailing season.
Yes, CCL stock is cheaper. And, to be honest, it may well be too cheap. I don’t believe Carnival is going bankrupt. Forced to choose, I’d rather own CCL at $12 than short it.
But there is no shortage of options for investors buying the dip in this panicked market. Bonds that yield double-digits offer another alternative for playing Carnival as well.
Outside the industry, there are many quality companies available at a discount. It’s more attractive to own a quality company with a strong balance sheet that’s declined 25% than a wobbly one facing years of pain that’s dropped 75%.
As the bounce in CCL stock reverses, the market seems to be coming to that same conclusion. It’s going to take Carnival years to work through this mess. In the meantime, investors can and should look elsewhere.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.