As the novel coronavirus pandemic impacts economic activity and consumer sentiment, it’s about survival for companies in several sectors. In particular, sectors like energy, airline, cruising and tourism are severely impacted. Carnival (NYSE:CCL) stock has witness significant correction in the current year with the cruising activity almost coming to a halt
However, in the recent past, CCL stock has seen some positive momentum. I believe the stock has more upside from oversold levels.
From a macroeconomic perspective, the U.S. is likely to get back to work relatively soon. Scott Atlas, former chief of neuroradiology at Stanford University, has been calling for the lockdown to end. A staggered exit from the lockdown is likely to boost equity markets and the worst hit sectors.
On the flipside, the Centers for Disease Control and Prevention has issued orders that prevent cruising in U.S. waters until July. However, that’s not a concern as long as the economy gradually gets back to its feet.
A Strong Liquidity Buffer
The primary reason to be positive on Carnival is the company’s ability to navigate the crisis. In the recent past, the company has ramped up its liquidity.
In March 2020, the company has drawn dawn its $3 billion multi-currently revolving credit facility. Additionally, the company closed its private offering of $4 billion in senior secured notes due 2023. Another private offering of $1.95 billion in convertible senior notes was closed in April 2020.
Incorporating the proceeds from the common stock offering, the company has nearly $9.5 billion in liquidity buffer.
Wedbush analyst James Hardiman believes that CCL is likely to have a monthly cash burn of $500 million. This implies an annual cash burn of $6 billion. A similar view comes from UBS analyst Robin Farley who believes that the company can stay afloat for 12-13 months in a zero-revenue scenario.
Further, if the industry conditions remain depressed, aggressive cost cutting is likely. I expect monthly cash burn to reduce. Overall, survival is not a concern for Carnival. As the lockdown is lifted, focus should shift to gradual revenue growth. This is likely to take CCL stock higher.
From the perspective of capital expenditure, Carnival Corporation has new ship capital expenditure of $4.8 billion for FY2020. In addition, the company has a capital expenditure of $3.6 billion for the coming year. In all probability, the capital expenditure for the current year will be deferred. This will help in conserving liquidity.
A Positive Outlook Beyond the Crisis
There are several factors that make Carnival attractive for the long term.
It’s worth noting that people are still booking for cruises for the next year. According to reports: In the last 45 days, CruiseComplete.com an online cruise marketplace, has seen a 40% increase in bookings for 2021 compared with 2019. Carnival CEO Arnold Donald has also commented on “substantial bookings” for the company for the coming year.
Another factor that supports my bullish view is the low penetration in the cruising industry. As of 2019, the market penetration for North America was 3.89%. For Europe and Asia Pacific, the penetration was 1.41% and 0.2% respectively. This leaves ample room for upside in cruising.
Specific to Carnival, the company is considering cutting passenger capacity in its cruise ships. While this will impact revenue, it makes cruises relatively safer from the coronavirus perspective.
The Bottom Line on CCL Stock
For FY2019, Carnival reported cash interest expenses of $171 million. The company recently raised $4 billion at an interest rate of 11.5%. In other words, the company’s leverage will increase in the coming quarters along with an increase in debt servicing cost. This will eat into the company’s profitability amidst equity dilution.
However, even with this risk factor, the stock is depressed and can rally from current levels. Importantly, if cruising does witness gradual revival in 2021.
Overall, there are challenges for Carnival. The most important ones being return of traveler confidence and impact of leverage beyond the crisis. However, CCL stock trades 75% below its 52-week highs and there is scope for upside even with the headwinds.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
