If you invested in Carnival (NYSE:CCL) at the end of 2019, you have a year to date total return of 75.7% through April 21. While CCL stock has recovered some of its losses in April, if it’s going to get to $20 or higher in 2020, it needs a whole lot of help.
To say that it’s been a disastrous year for the cruise industry would be a giant understatement. There’s little comfort to provide shareholders of Carnival, who’ve seen their investment go from one of the hottest to one of the worst bets on the planet.
The media headlines have begun to mention the “B” word. Just ask the retail industry how that’s turned out. Not good.
As I write this, CCL is trading just under $12. That’s got me wondering if it can get to $20 or higher by the end of 2020; or is it destined to fall back to single digits as the industry struggles to recover, or worse yet, fall to zero.
Let’s consider all three options.
CCL Stock Hits $20 Before ’21
To have any hope of hitting $20 by the end of the year, Carnival has to lean on the loyalty of its many repeat customers to get registers ringing again.
What we know at this point is that the Centers for Disease Control and Prevention have shut down cruising until June 26. As a result, Carnival has canceled cruises through that date. In 2019, Carnival’s various cruise lines carried 12.9 million passengers. Based on the 2019 revenue of $20.8 billion, that’s approximately $1,614 per passenger.
Carnival CEO Arnold Donald recently stated that 50% of its customers whose cruises were canceled in the first two weeks of March have elected to receive credits for future cruises rather than cash refunds.
In the company’s first-quarter report Carnival said between mid-December and March 1, 2020, its bookings for the first half of 2021 were slightly ahead of last year during the same period. Between March 2 and March 15, it booked 546,000 occupied lower berths, considerably lower than last year’s pace.
Because the demand for cruises is highest in the third quarter between June and August, it’s possible that Carnival could generate some revenue during two of the three months in Q3 2020.
But that’s a big if.
In Q3 2019, Carnival carried 3.75 million passengers. Assuming it’s able to deliver 50% of that number in July and August, and based on average revenue per passenger of $1,614, it might be able to generate $2 billion in sales in Q3 2020, about 31% of Q3 2019 sales.
That’s better than nothing, a dire outcome that could still come to pass for the remainder of 2020.
But in a best-case scenario, I could easily see CCL stock trading above $20 by the fall.
CCL Stock Will Fall to Single Digits
It’s hard to imagine Carnival’s stock returning to single-digits. Before falling below $8 in early April, it last traded in single digits in 1996; America’s had four presidents since then.
The last time I wrote about Carnival was mid-March. At the time, I suggested that it might be prudent to wait if you were considering buying its stock as a speculative play.
At the time, CCL had just dipped into single digits; over the next month, it would proceed to rise to $18 before falling to a 52-week low of $7.80 in early April. And it’s now back up around $12.
“CCL had $9.2 billion in net debt at the end of November 2019, which represents 96.5% of its current market cap. With no assurances that business will come back once the coronavirus has been eradicated, I have to wonder if $9 is a buy despite the massive stock losses in 2020,” I wrote March 19.
“If you haven’t sold CCL stock, I would ride it out. If you haven’t bought, I would wait. There’s a good chance it could go lower.”
If Carnival hadn’t annoyed the CDC by letting cruises carry on with business as usual in early March, I could see Carnival making its way back in July and throughout the rest of the year.
However, the CDC may extend the no-sail order beyond the end of June. If that happens, the company loses revenues at its busiest time of the year. If so, I could easily see it creeping ever closer to bankruptcy.
Carnival Could Go Broke
InvestorPlace contributor Ian Bezek recently argued that even if Carnival doesn’t go bankrupt, it doesn’t make sense to own its shares because of the pain that will be inflicted on all of the cruise lines over the remainder of 2020 is likely to crush its stock price.
Bezek also highlighted the fact that the company added to its debt load by issuing a total of $5.75 billion in convertible notes at 5.75% and 11.5% interest.
Add this to the $9.25 billion outstanding at the end of November and we’re talking about a boatload of debt. That’s not good at the best of times, but it’s really bad when you’ve turned off the revenue tap.
Carnival’s current Altman Z-Score is 1.41. Anything below 1.81 is considered in distress and a bankruptcy filing could happen within the next 24 months. However, that doesn’t take into account its added debt and the serious shortfall in future revenue.
It’s important to remember that the original Altman Z-Score was intended for manufacturing companies. Edward Altman also created a model for service-based businesses. Carnival is a hybrid of the two. In the case of non-manufacturers, Altman removed the sales divided by total assets calculation, but I digress.
The point is, as sales fall off, and the company’s market cap declines, the likelihood of its shares going to zero accelerates.
At the end of the day, if you’re going to make a speculative bet on Carnival, I would continue to wait for it to fall into single digits to improve the risk-to-reward. Risk-averse investors have no business owning CCL.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
