Carnival Corp (NYSE:CCL) decided on May 4 to delay its full operations until Aug. 31, 2020. This is not going to help investors in CCL stock any time soon.
This is much later than Royal Caribbean Cruises (NYSE:RCL), which technically is scheduled to begin operations after June 11. I recently wrote that RCL stock is deep trouble and investors should stay away from it.
Carnival is a little different. It is the only cruise company so far to produce relatively recent financials in its April 10-Q filing for the quarter ended Feb. 29.
Carnival Seems To Have Ample Liquidity
As of Feb. 29, Carnival had $1.35 billion in cash on its balance sheet. Since then, the company has raised significant amounts of money.
Carnival’s recent debt and equity offerings have been successful. It has sold about $600 million in common stock, $4 billion in secured debt and $2 billion in convertible debt.
The secured debt has an 11.5% coupon rate and the convertible notes are priced with a 5.25% coupon. Both pay their holders semi-annual interest.
These offerings give Carnival around $7.5 billion to $8 billion in liquidity to carry it through some rough periods. It will not generate any revenue or cash flow through Aug. 31. After that, one can expect that operations will only slowly ramp up. People need to become used to cruise travel as a safe entertainment option.
So far, unlike Royal Caribbean, Carnival has not stated how much cash per month it is burning. However, Barron’s recently estimated that Carnival is burning $834 million per month. It estimates Carnival has just nine months of liquidity left. That coincides with my estimates of the company having $7.5 to $8 billion of liquidity (i.e. $7.5 billion divided by $834 million cash burn is nine months).
So in four months at the end of August Carnival will still have about $4.1 billion to $ 4.6 billion in cash left. That should help it over the next year as cash flow will rises.
What to Do Next With CCL Stock?
Barron’s suggests that although the industry has weathered previous storms, it is now “a race against time.” The magazine quotes analysts who say that most cruise line operators won’t begin generating revenue until sometime next year.
I suspect this means that Carnival will likely come back to the market for either debt, convertible debt and/or straight equity offerings.
This means that existing shareholders should expect to get diluted quite severely over the next year. So here is the quandary. Not only can we not forecast revenues, earnings and cash flow with any certainty, but we also don’t know the denominator. There is no way to estimate how many shares will be outstanding in a year or so.
In my mind, that means investors should be cautious. There will always be a more advantageous time to buy at the point of maximum pessimism. For its part, Barron’s never really came to a conclusion about whether to invest.
But I have. I feel that there is essentially no margin of safety here in CCL stock or any of the related travel stocks.
Short Sellers Love CCL Stock
The Wall Street Journal recently reported that Carnival stock was among a few stocks that short sellers love. They have added over $797 million in short positions against CCL stock, RCL, Marriott (NASDAQ:MAR), and Wynn (NASDAQ:WYNN) in the past month.
That means these investors are betting the stocks will fall. That is how they make money. So expect short sellers to bludgeon the stock with any piece of news, either good or bad, as long as it is not extremely positive news. That is how they like to work.
Keep Your Powder Dry
Therefore, I suggest you wait until CCL stock has taken another huge dip. For example, right now is trades 82% over its previous low point this year. In essence, wait until the short sellers have made their money.
Here is a target price. Right now I estimate that the tangible book value is between $19 and $20 per share, or thereabouts. This assumes that the existing $8 billion in liquidity burns up in losses. If the company has to add on more debt that gets burnt up, the tangible book value will fall further.
Let’s assume that it raises another $4 billion. That will reduce tangible book value (after it is used up) by $5.75 per share or so. That brings forecasted tangible book value to $14.25 per share. That is close to the price on Friday, May 8, of $14.21.
Following the principle of investing with a margin of safety, investors should demand at least a 30% margin. That means setting a price to invest in CCL stock at around $10 or so (i.e., $14.75 less 30% equals $9.98).
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
