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Carnival Will Attract Bottom-Fishers Despite the Ugliness

It’s safe to say the cruise line continues to face trouble. The novel coronavirus could have long-lasting affects for the industry. However, Carnival (NYSE:CCL) stock may already be fully “priced for disaster.” Shares have rebounded off their March lows. But the stock still trades for less than one-third of where it was when the outbreak first hit China.

Carnival Will Attract Bottom-Fishers Despite the Ugliness
Source: Ruth Peterkin /

There’s good reason to expect troubled waters for the company. Even if things “return to normal,” it could take time for cruise demand to rebound. As our own Matt McCall put it April 28, expect travelers to “voluntarily quarantine,” and avoid high-risk activities like cruise ships.

Decreased demand is bad news for the industry, with its high fixed costs and leveraged balance sheets. And given Carnival doesn’t pay U.S. taxes, don’t expect the kind of bailout the airlines received. Yet, the cruise line space may be a great place to make contrarian buys.

Above its rivals, Carnival stock could be the best opportunity. Rivals like Royal Caribbean (NYSE:RCL) may be less attractive ways to bet on a cruise line rebound. With relatively strong liquidity, Carnival could have a better shot of surviving headwinds without a bankruptcy filing.

I don’t see the stock bouncing back to past highs anytime soon. But if things wind up less bleak than they look, shares could see massive appreciation from current prices. Let’s dive in and see why today’s uncertainty makes CCL a bottom-fisher’s buy.

Is CCL Stock the Best Cruise Line Rebound Play?

Investors have three major ways to bet on a “return to normal” for the cruise line space. You can buy Carnival, Royal Caribbean, or Norwegian Cruise Line (NYSE:NCLH) stock.

In theory, you could buy all three, and spread your bets around. However, this may not be the best way to play. For one thing, the three cruise line stocks have varying levels of liquidity. JP Morgan’s Brandt Montour says Carnival could survive nine months without any revenue coming in its coffers. Royal Caribbean? Seven months. How about Norwegian? Just five months of liquidity.

Yet, these estimates are debatable. Analysts at Wells Fargo believe Royal Caribbean is in the best shape liquidity-wise. As I discussed on April 28, Stifel analysts also sees RCL as having a stronger amount of liquidity.

So, who’s right, and who’s wrong? It’s highly subjective which cruise line stock can last the longest in the current situation. The bottom line is all of them are in a bad place right now. Hemorrhaging cash, levering their balance sheets to stay afloat, this isn’t a sector for slam-dunk opportunities.

Yet, it may be reasonable to say Carnival has the best shot to weather today’s choppy waters, avoid Chapter 11, and perhaps rebound tremendously in the coming years.

All Signs Point to Carnival Surviving the Storms

Incorporated in Panama, Carnival avoids paying corporate taxes to the United States. In good times, that’s a benefit. But when things get tough, operating offshore means “no dice” in terms of getting a little help from the U.S. government. Or does it?

As The Wall Street Journal reported April 26, the Federal Reserve may have indirectly helped Carnival by its recent change in policy. With the Fed buying investment-grade debt, there’s more liquidity out there, to the benefit of higher risk names like this company.

Before the Fed policy change, Carnival was looking at borrowing money at rates topping 15%! But in the aftermath of the Fed’s intervention, the company was able to raise $2.5 billion at much lower interest rates.

Granted, the cruise line is still paying a high yield to attract lenders. But it does demonstrate, despite its offshore incorporation, Carnival can still benefit from U.S. intervention.

Yet, what does that mean for CCL stock? Don’t bet on shares bouncing back to 52-week highs. The recent debt offering and capital raise means shares will not rebound as highly due to dilution.

But the stock could still move higher from today’s price level (around $14 per share). With this in mind, the risk/return proposition may be in your favor.

Be Patient, But Buy CCL Stock Now as Shares Remain Cheap

Cruise line stocks are high-risk, high-return opportunities right now. But they are not all great buys. It’s debatable whether Carnival or Royal Caribbean is stronger liquidity-wise.

But, as this analyst put it last month, Carnival’s lower debt relative to size may make it a better rebound play than RCL stock. With the company indirectly benefiting from Fed policy, the cruise line may still benefit from U.S. moves to bolster the economy. Even if the cruise line operates offshore to avoid taxes.

This isn’t a slam-dunk opportunity. But for those looking for a cruise ship rebound play, consider CCL stock.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.

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