The wild ride in shares of Carnival (NYSE:CCL) stock gives speculators and bottom-fishing traders a chance to trade its volatility.
Yet the luxury cruise ship industry faces a major challenge that it may not overcome. The novel coronavirus shut down the tourism industry in the near term. The long-term damage to the sector will likely dissipate as travelers resume their adventures.
But if the demand for cruise lines is slow to recover, then CCL stock may underperform the markets.
Carnival Shores Up Its Liquidity
Carnival will need to raise billions in debt just to keep the business running at minimal levels. With cruise ships docked and the company unable to entertain its customers, investors should expect significant operating losses for at least the next few quarters.
Carnival must still pay its suppliers and staff. Plus, it has to maintain ships even though they are not going anywhere. Still, investors cannot shake off the near-term troubles ahead. With travel restrictions in place and bans on the cruise line industry, CCL stock has no positive catalysts to lift it.
Looking beyond the current Covid-19 pandemic, when restrictions ease and travelers plan for 2021 vacations, Carnival may start accepting bookings. But buying CCL stock when most major countries are in a lockdown will test investors’ nerves. Besides, the cruise ship companies may need to increase advertising spending and offer steep discounts to spur demand. That would hurt profit margins and lead to quarterly losses.
No Bailout Needed
The latest multibillion-dollar bailout for the tourism industry did not include companies like Carnival. Arnold Donald, Carnival’s CEO, said that “We don’t need a bailout in terms of giving us money.” Although CCL stock rallied in hopes of such help, Carnival does not need it.
Still, to sustain its financial liquidity, the CEO said that “a loan guarantee would be helpful.”
The company has a portfolio of brands that includes Holland America, Princess Cruises and Seabourn. It has a cruise line in the United Kingdom, Germany, Australia and Southern Europe. It attracts nearly 13 million guests each year.
Carnival has a strong balance sheet. Its debt-equity ratio is 0.5 times. Still, its debt grew at a compounded annual growth rate of 1.6% since 2014. Back then, its net debt was $7.4 billion but it since rose to $9.3 billion.
Higher capital expenditure hurt free cash flow. With the near-term FCF falling, the company could cut its dividend to preserve cash. The firm may cut expenses, reduce staff and refinance its debt at lower interest rates. This will not prevent a quarterly loss, but will ensure its long-term survival.
Valuation on CCL Stock
Analysts are either too optimistic or failed to update their price targets on CCL stock. The average price target is $41, according to TipRanks, albeit most ratings are in the “hold” category. In a 5-year discounted cash flow EBITDA exit model, assume revenue falling by 50% this year. Sales improve starting in the fiscal year 2023:
| (USD in millions) | Input Projections | |||||
| Fiscal Years Ending | 19-Nov | 20-Nov | 21-Nov | 22-Nov | 23-Nov | 24-Nov |
| Revenue | 20,825 | 10,413 | 7,809 | 7,809 | 9,762 | 14,643 |
| % Growth | 10.3% | -50% | -25% | 0% | 25% | 50% |
| EBITDA | 5,437 | 356 | 2,188 | 2,114 | 2,874 | 4,311 |
| % of Revenue | 26.1% | 3.4% | 28% | 27.1% | 29.4% | 29.4% |
In the above scenario, CCL stock is worth $19 a share.
Buying CCL stock before uncertainties have peaked is dangerous. Those who guessed the bottom will get rewarded. Cautious investors might want to wait for clarity before starting a position in Carnival.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.
