Perhaps with the exception of some gaming equities, Carnival (NYSE:CCL) and other cruise line operators are among the epicenters of coronavirus market capitalization destruction with CCL stock proving as much with a first-quarter loss of 74.19%.
Due to COVID-19 pandemic, Carnival packed a lot of bad news into the first three months of 2020, a theme that did relent on March 31. To cap what was a tumultuous quarter, Carnival said it’s selling $1.25 billion worth of equity – diluting existing investors in the process – selling $4.75 billion worth of private debt and suspending its dividend so if you think the 15.19% yield CCL stock closed the quarter was tempting, don’t take the bait.
Carnival is taking those steps of capital conservation and raising because unlike airlines, casino operators and other U.S.-based big businesses that want to participate in the Treasury Department’s $454 billion coronavirus loan program, Carnival isn’t based in the U.S.
It’s incorporated in Panama, one of the tax havens of Latin America. That’s fine and dandy when times are good, but when a company needs Uncle Sam’s assistance, he’s going to make sure that firm is a tax-paying client.
Murky Outlook
In announcing the aforementioned steps to shore up balance sheet, Carnival also said 45% of customers are accepting future cruise credits over full refunds.
All things considered, that’s not a bad percentage, but industrywide, 900 sailings are canceled, affecting 4.5 million passengers, and expectations that ships could be back on the seas again by mid-May seems like a long shot, according to Stifel analyst Steven Wieczynski.
“If the virus peaks in April/May and travel fears begin to subside sometime after that, we still believe cruising would be impaired (still sailing but impaired) until sometime in the fall as cruise lines will have to regain faith with the cruising population,” said the analyst.
Further adding to the stress on CCL’s financial picture is that should it need to tap bond markets again, it will do so with a lower credit rating as Moody’s Investor’s Service lowered its grade on the cruise operator to Baa3 from Baa1 on March 31. That’s lowest investment-grade rating used by the research firm.
“The downgrade to Baa3 reflects the unprecedented impact the global spread of the coronavirus (COVID-19) is having on the cruise industry, including the suspension of all sailing operations for Carnival’s brands for at least 30 days,” said Pete Trombetta, Moody’s lodging and cruise analyst.
To Wieczynski’s point about May being a long shot for cruise lines to get back to business, Trombetta said, “Moody’s anticipates that cruise lines will have to extend the suspension through the end of June.”
Much like gaming companies, cruise operators are currently facing zero revenue scenarios with some analysts questioning how long these firms can survive based on current cash positions. With CCL, the company likely has the liquidity to survive through the end of the year, perhaps a little longer, assuming it can get back to business late in the third quarter.
Bottom Line on CCL Stock
Speculate for a moment that CCL has the liquidity to stay afloat, no pun intended, for some decent amount of time. That would be a positive, but even if COVID-19 is solved/cured over the near-term, that’s not a guarantee consumers will spend and travel as they did before the virus hit.
The reality is the travel and leisure industry needs to prepare for some seismic shifts in consumer spending habits and tastes and the industry may not likes those changes.
“The question we continue to field is around consumer’s appetite for cruising once COVID-19 has been controlled and been removed from the media,” said Wieczynski. “We don’t believe cruise perception will be impaired permanently.”
Still, it’s going to take a while for the cruise business to regain its pre-virus form.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
