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Investors Are in a Waiting Game With Carnival Stock

Carnival has plenty of cash on hand to wait out a resumption of cruises

Even though Carnival Corporation (NYSE:CCL) stock is trading in a narrow trading range around $15, its lack of volatility on the markets is a positive development.

CCL Stock: Investors Are in a Waiting Game With Carnival
Source: Flickr

Currently, investors are willing to value the company with about a $13 billion market capitalization. Although this is still a 68% discount from the 52-week high of CCL stock, the market is carefully watching as countries around the world begin restarting their economies after the novel coronavirus.

If they find a workable balance between restarting the economy and keeping infection rates low, then the tourism sector may recover and provide CCL stock a needed boost.

Cruise ship companies are already seeing strong, pent-up demand. On May 4, Carnival announced a plan to phase in service. After cancelling all North American cruises scheduled from June 27 to July 31, the company will resume cruises with three ships starting on Aug. 1. The homeport cruises from Port Canaveral, Miami, and Galveston will restart.

Bookings apparently surged by six-fold in the three days after this announcement, according to TMZ. This suggests that Carnival may fill its bookings as it restarts more ships.

Risks for CCL Stock

Consumers may try to get a booking on the upcoming cruises but unless the Centers for Disease Control allows ships to sail again, investors are speculating on Carnival’s rebound.

Also, TMZ based its reporting of a sharp increase in booking on a narrow set of data. Carnival cannot plan to re-hire staff and prepare its ships for sailing unless those bookings are at the maximum capacity.

With social distancing likely here to stay, Carnival will likely need to operate at up to 70% capacity. For example, some airlines may keep middle seats empty. It may fly at a maximum load of just 62%. If Carnival is forced to run at similar loads, it may lose money every time its ship departs.

Travelers Are Not Afraid

Assuming the novel coronavirus is least dangerous to young travelers, this demographic will not hesitate going on a cruise. But passengers at the age of 60 and older may make up around 33% of the travelers. Worries over getting the virus while at sea may permanently hurt the demand for cruise ship vacations in this age group.

Carnival and the other cruise ship companies will need to clean the ship more often to minimize the risk of the virus spread. It will need to offer handwipes, install hand sanitizer dispensers everywhere, and promote social distancing.

Once again, it may follow the airline’s playbook by having staff and customers wearing masks. Thermal scans on all passengers before the ship disembarks would lower the chances of bringing an infected passenger.

Fair Value


Click to Enlarge
Source: Data Courtesy of Stock Rover

Carnival offers investors high value with a score of 90/100.

The stock has a -13% margin of safety, which implies a fair value of $12.64. Due to its uncertain business, investors cannot have high confidence on what the stock is really worth. Still, the company’s $8 per share public offering on April 2, 2020 will add $500 million to its cash on hand.

It also issued a $4 billion worth of secured notes due in 2023 and $1.75 billion also due that year. The increased liquidity will prevent the firm from filing for bankruptcy.

Carnival is in a waiting game for now. Once the CDC advises for allowing cruise ships to resume, it will set the guidelines on a safe reopening. The more optimistic investor may assume a discount rate of 8.5% in a five-year discounted cash flow growth exit model:

Metrics Range Conclusion
Discount Rate 9% – 8% 8.5%
Perpetuity Growth Rate 3.5% – 4.5% 4%
Fair Value $13.19 – $35.62 $21.92
Upside -1.552 51.7%
Data courtesy of Finbox

Assuming that revenue falls by over 50% this year but grows by at least 15% in the next four years, Carnival stock is worth around $22 a share.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/investors-are-in-a-waiting-game-with-carnival-stock/.

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