Although Carnival (NYSE:CCL) could survive the novel coronavirus crisis, it could also easily go bankrupt. For that reason, investors should avoid CCL stock. I recommend that those looking for a high-risk, high-return play on a resurgence of the travel sector stick to airlines.
The airlines are much better capitalized, can receive additional funds from the government, are much more essential to consumers, and are showing many more meaningful, imminent green shoots than Carnival.
After examining all of Carnival’s debts and the money it has raised from bonds, a Seeking Alpha columnist determined that the cruise line operator “will have sufficient cash to make it through the year, although barely.” The problem is that a vaccine for the coronavirus is not likely to be developed for 12-18 months. And some say that a vaccine may never be developed.
As a result, Carnival’s current cash may not be sufficient to keep the company afloat until demand for cruises reach even 30%-40% of its pre-pandemic levels. And since it appears that Carnival will not be able to access government funds, there’s a good chance that it will have to declare bankruptcy.
Will Carnival Survive?
I’m not saying Carnival is definitely doomed. I think there’s a good chance that Gilead’s (NASDAQ:GILD) remdesivir and other drugs can lower the coronavirus death rate to the point where most people are no longer very scared of the virus. I also believe there’s a decent possibility that the herd immunity phenomenon and favorable mutations in the virus will make it much weaker and limit its spread in the fall and winter.
If those scenarios unfold, demand for cruises could jump tremendously by the fall, making CCL stock a great buy now. And it’s even possible that the sector could benefit from a rebound in the summer as the virus’ spread falls sharply in the warm weather. But, given the disastrous experiences of many people who took cruises in February and March, I wouldn’t count on the latter scenario unfolding.
Airlines Can Stay in Business Longer
The airlines are in much better position to withstand the crisis than Carnival. Barclays, which is actually fairly pessimistic on the sector, wrote that the funds already provided by the government “should get carriers through early 2021, at a minimum.” That sounds like the airlines will be able to stay in business through the first quarter of 2021. Thus, the airlines have a much better chance of hanging on until a vaccine arrives than Carnival.
And, certainly if a vaccine is close to being ready, the government will provide enough aid to the airlines to tide them over until the vaccine can be administered.
During the last week of April, the number of airline passengers surged around 30% from the low point of 95,000 earlier in the month, reaching 154,695 on April 30, the highest total since March 29. And Jude Bricker, CEO of Sun Country Airlines said, “destinations where golf or family activities can still occur are seeing a gradual return of demand.” So although air travel remains at extremely low levels, the sector looks like it’s already on the road to recovery.
Meanwhile, a recent survey of Texans found that 28% were likely to fly by July 30. Among those between 25 and 35, 34% said they’d likely fly before July 30. In the 35-44 age group, the percentage came in at 27%. So around 30% of people in their prime earning and travel years are already ready to fly. As the deaths from the virus drop beginning in June, that percentage will likely rise meaningfully.
Cruise Wear is Nowhere
The cruise sector, by contrast, the only “green shoots” I’ve seen involve 2021 data. And as we’ve seen, by that time CCL stock could be wiped out.
And, as I’ve pointed out previously, it makes sense that people would be willing to fly way before they’ll take cruises. First, it’s very time consuming to travel to different parts of the country or the world without taking a plane, while cruises are just one of many vacation options. Secondly, many of the people who took cruises during the coronavirus crisis suffered horrible experiences, while nobody has had a horrible, prolonged experience on a plane. Finally, no one is going to be able to fit in their cruise wear wardrobe after staying at home for so long.
Bottom Line on CCL Stock
Since Carnival’s current funds only look set to last until the end of 2020 and there’s a good possibility that its revenue will not meaningfully bounce back before then, there’s a good chance that Carnival will declare bankruptcy.
By contrast, airlines can hang on significantly longer with their current funding and can easily get additional funds from the government, if necessary. As a result, airlines have a much better chance than Carnival of hanging on until a vaccine is administered or the virus largely disappears. Moreover, the airlines, unlike the cruise industry, are already showing green shoots. As a result, I recommend selling CCL stock and buying shares of the major airlines, including Southwest (NYSE:LUV) and Delta (NYSE:DAL).
As of this writing, Larry Ramer owned shares of GILD stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.