Cruise stocks were on fire from mid-March to mid-June, on optimism that the novel coronavirus panic will prove to be fleeting and that the cruise industry will get back to business as usual in 2021 and 2022. The world’s largest cruise line operator, Carnival (NYSE:CCL), was no exception to the trend. CCL stock rose more than 200% from early April to early June.
Then turbulence hit.
Specifically, amid the loosening of economic restrictions across America, coronavirus case counts nationwide started to rise in June. Wall Street freaked out. Stocks fell. Cruise stocks fell more. CCL stock fell the most.
From its early June highs, CCL stock has dropped about 30%.
But, these “second wave” fears are overstated, the most realistic path forward is for continued economic and consumer behavior normalization over the next few months, and the broader cruise line business is still positioned for a meaningful recovery in 2021/22. Ultimately, then, this second wave sell-off in CCL stock is a longer-term buying opportunity.
Here’s a deeper look at why.
Covid-19 Second Wave Fears Are Overstated
In the big picture, the economic fallout of a second wave of Covid-19 won’t be noticeable.
That isn’t to say a second wave isn’t coming. It is. Arguably, it’s already here. With everyone socializing and doing quasi-normal things again, you are unequivocally going to see a rise in Covid-19 cases.
But, it is to say that this second wave won’t derail the current economic recovery.
That’s because cabin-fever consumers and nearly bankrupt businesses are desperate to get back to some semblance of normal. As such, consumers and businesses alike are both increasingly learning how to keep the world turning while simultaneously managing Covid-19 risks via things like social distancing, plastic barriers and wearing masks.
Both parties will get better at this balancing act over the next few months. As they do, the human costs of the virus will remain relatively mitigated, while economic activity will continue to perk up.
Indeed, we already seeing this happen. While coronavirus cases have risen steadily in June, so has consumer mobility, restaurant and store foot traffic, and consumer search interest in all things travel-related. Simultaneously, Covid-19 related hospital use and death counts have not risen.
I suspect these trends will persist for the foreseeable future. As they do, stocks – and especially cruise stocks, like CCL stock – will stay in rally mode as the world gets back to normal.
Carnival Stock Is Undervalued
Based on my numbers, CCL stock could rally more than 65% over the next 18 months.
My modeling on Carnival is simple.
Fiscal 2020 will be an awful year, defined by strong demand in the first two months of the year, zero demand for most of the year and sluggish demand when cruises do reopen in the last few months of the year (if that even does happen).
Regardless, fiscal 2021 will be a much better year. Consumers will get more comfortable with riding on cruises, especially if prices remain discounted and if a vaccine is approved by early 2021. Concurrent to that, Carnival will increase cruise capacity. The company’s revenues and profit margins will meaningfully rebound.
By fiscal 2022, things should be largely back to normal for Carnival. The virus will be two years old. The vaccine will have been in circulation for 12 months or more. Global travel trends will start to look like they did in 2019.
Assuming so, Carnival’s fiscal 2022 revenues should be awfully close to where they were in fiscal 2019 ($21 billion). Profit margins won’t rebound to where they had been historically – roughly 17% average operating margin from 2015 to 2019 – but should recover to a lower steady-state around 10% to 12% (thanks to higher cleaning and maintenance costs).
Under those assumptions, $2.40 seems like a doable earnings per share target for Carnival by 2022. CCL stock historically trades at a forward earnings multiple of 13. That combination implies a fair 2021 price target for CCL stock of over $30, or more than 65% above where shares trade today.
Bottom Line on CCL Stock
The Covid-19 pandemic – while big and serious – is fleeting. The world is already gradually getting back to normal. This normalization will persist over the next few months and years, even in the face of a second wave of the virus.
Sustained normalization will drive sustained strength in CCL stock, because shares remain discounted on lingering Covid-19 fears.
So buy CCL stock on sizable dips, and hold for the next 12 to 18 months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
