It doesn’t take a technical chart analyst to know that investors in Carnival (NYSE:CCL) stock have suffered losses lately. And it’s probably not much consolation to hear J.P. Morgan analyst Brandt Montour say that investor sentiment for the cruise line sector “probably couldn’t be worse.”
On the other hand, extreme pessimism is the exact point where value investors should get excited. And there’s no question that we’ve reached extreme pessimism when it comes to CCL stock.
The share price was above $50 in the middle of January. By mid-May, it fell all the way down below $13.
A trailing 12-month price-earnings ratio of 4.5 is ultra-low. That suggests that there’s a fair value proposition in CCL stock now. Or does it? Maybe it’s relatively cheap for a good reason. And maybe Carnival’s recent job cuts are a sign of trouble.
Let’s take a deep dive and see if the stock really is a bargain at this price point.
Bad Cruise News
There’s no denying that Carnival needs to save money now. The spread of the novel coronavirus absolutely wrecked a once flourishing cruiseline industry.
As you may recall, the Centers for Disease Control dealt a major blow to the industry on March 14. That’s when the CDC issued a no-sail order. This order forced U.S.-based cruise ships to remain docked for 100 days.
And that’s just the CDC’s order. Any other regulatory mandates, local or otherwise, must also be respected. Still, the CDC’s order does have a silver lining. At least now the major U.S. cruiselines might have some idea of how long the no-sail requirement will last.
With this harsh news in mind, Carnival recently announced its limited and tentative plans to start up the company’s cruise operations again. If this goes according to plan, Carnival could have eight ships sailing on Aug. 1.
Don’t get too excited, though, as Carnival still intends to cancel all of the company’s other cruises until at least Aug. 31. Moreover, the company acknowledges that “Any resumption of cruise operations – whenever that may be – is fully dependent on our continued efforts in cooperation with federal, state, local and international government officials.”
Cutting and Saving for the Future
Still, any glimmer of hope that Carnival’s ships will sail again ought to be a relief for CCL stockholders at this point. The company is burning through $1 billion in cash every month that its fleet is docked. So, Carnival really needs to get its ships sailing as soon as it’s safely and legally possible.
And just as importantly, Carnival needs to do practically whatever it takes to mitigate its cash-burn issue. One way to fill the money pit is by letting go of workers. It’s an unpleasant thing to have to do, but Carnival’s future might depend on it.
And that’s precisely what Carnival is doing. The company recently announced its plan to permanently lay off a minimum of 820 Carnival employees in Florida.
At the same time, another 537 Carnival workers will reportedly be placed on furlough for a period of six months as a cost-cutting move. Between the terminations and the furloughs, nearly 46% of Carnival’s 3,000 or so employees in Florida will be relieved of duty.
In addition, an unspecified number of Carnival’s workers in California and Washington state will reportedly be let go either temporarily or permanently. Layoffs in other states are also a possibility. However, the “majority” of the layoffs will reportedly take place in Florida, California and Washington.
Carnival CEO Arnold Donald highlighted his mixed feelings in implementing these necessary measures. “Taking these extremely difficult employee actions … is a very tough thing to do … [but] it’s necessary, given the current low level of guest operations and to further endure this pause,” he said.
The Takeaway on CCL Stock
There’s no way to measure exactly how much money Carnival will save due to the aforementioned worker reductions. Still, at least the company’s taking action.
None of this will make it easy to own CCL stock, but at least it’s possible to see the value of taking a stake in the company. Shareholders should turn a profit eventually, but just know that you’ll likely be sailing rough seas for a while.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
