Carnival Cruise Lines (NYSE:CCL) has been one of the biggest gainers in the entertainment and travel space in recent weeks. Sure, CCL stock is still down sharply since before the novel coronavirus began. However, since the March lows, Carnival’s stock has soared from a low of around $8 back to almost $14 now. That’s a 75% rebound.
It’s particularly impressive given that Carnival sold a ton of stock down at $8. Carnival brought in a bunch of new investors to help keep the firm afloat, with notable backers including Saudi Arabia’s investment arm.
This has given investors reason for hope. Our Thomas Niel made the argument for Carnival being the best cruise line stock for an eventual recovery in the space. I agree, at least on a long-enough time horizon. Carnival’s successful fundraising efforts have made it the best-positioned of the cruise lines. Carnival is likely to survive the downturn.
This doesn’t necessarily mean it’s a great investment at $14 now though. Particularly since the company just sold a lot of stock at $8; you’re no longer buying at a fire sale price here. Additionally, while parts of the economy are now reopening, life won’t get back to normal for cruise lines in the near-term.
A Return to Sailing… Kind Of
Earlier this week, Carnival announced that it will be getting back to business soon. On Aug. 1, Carnival will return to a limited sailing schedule. This puts it ahead of Norwegian Cruise (NYSE:NCLH) and Royal Caribbean (NYSE:RCL) to become the first major operator to launch new voyages since the disease outbreak got underway.
Investors have cheered this move to resume some operations. Surely some revenues are better than remaining in complete shutdown. But don’t count on this to be a major positive for Carnival yet. For one, it’s only a limited schedule, with cruises resuming from just three U.S. ports. Other U.S. and Australian Carnival cruises won’t get going again until this fall or later. On top of that, Carnival is giving out huge discounts. It’s offering voyages for as little as $28 per day to get people back on board.
It Will Take Longer for Profitability to Return
However, don’t expect Carnival to make much money at that sort of rate. And on the other hand, expenses are likely to be up as it will have to be more diligent about sanitation and safety given the possibility of the virus’ return. In addition, crew members may expect additional pay in return for the elevated risk they face at present.
Speaking of risk, investors should think about the potential downside of reopening cruise lines too soon. Obviously, hopefully everything goes smoothly and there are no subsequent problems. But what happens if the virus pops up on a Carnival cruise in August once they are sailing again? Another round of cancellations and negative headlines could be a huge blow to the already-struggling industry. Carnival is running a large risk here for a seemingly modest benefit, even if everything goes off without incident.
The Verdict on CCL Stock
The economy is starting to make its first tentative steps toward reopening. And Carnival is among the hardest-hit firms that are now starting to find a new path forward. It’s understandable why investors are excited.
But let’s be reasonable here. Cruising in August is not going to bring the company back to profitability anytime soon, particularly not when they sell cruises for as little as $28 per day. And the risk of another ship becoming a virus vector can’t be discounted either. In the bigger picture, the American consumer is hurting with unemployment soaring to levels last seen 80 years ago.
There’s a far cry between going to a local restaurant or barber shop once things reopen, and going on a cruise. There’s little indication that people have the desire to spend for big vacations yet, or that they are eager to be out in a situation where they could be exposed to the virus again. Combine all that with Carnival’s less than pristine balance sheet, and there’s no reason to chase CCL stock up here after its huge rebound. Carnival is heading in the right direction now, but the seas ahead will still be choppy.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
