Carnival (NYSE:CCL) reported preliminary second-quarter results on June 18. The cruise operator had an adjusted net loss of $2.4 billion or $3.30 share from $700 million in revenue. CCL stock dropped about 11% since releasing the news.
At this point, it makes no sense for investors interested in buying and selling Carnival stock, in giving one bit of thought to analyst estimates. My cat could do just as good a job modeling future sales and earnings. The latest results show just how big a mug’s game professional research analysis is at the moment.
Carnival’s Miss Was Big
On the top line, Carnival’s sales missed the consensus estimate of $809.1 million by $109.1 million. Only a 13.5% miss. In the upside-down business environment that is the novel coronavirus, that’s actually quite good.
However, the analysts were expecting an adjusted loss of $1.52. Carnival delivered a loss that was 117% greater than the consensus estimate.
To be fair to analysts, they had no way of knowing what the exact size of Carnival’s impairments would be during the quarter — it was $1.95 billion or $2.71 a share — but given the size of the earnings miss, you have to wonder what the value of analyst estimates are in times of crisis.
In case you’ve wondered, a total of 22 analysts cover Carnival. Three rate CCL stock a “buy,” 15 view it as a “hold,” and four rate it “underweight” or an outright “sell.” The mean rating is a “hold.” The 12-month target price is $16.23, about where it’s currently trading on June 24.
For 2020, the analyst estimate for the fiscal year is a loss of $5.68. In fiscal 2021, it expects that loss to drop to $1.55 a share. That’s not too bad until you realize that in 2019, Carnival earned $4.27 a share.
Carnival Will Burn $650 Million a Month
Carnival says it will burn $650 million per month between June and November. On June 22, it said that there would be no cruises until the beginning of October.
“During this unprecedented pause in our business, we have continued to assess the operating environment and confer with public health, government and industry officials,” Carnival Cruise Line president Christine Duffy told booked guests and travel agents in a letter.
This was Carnival’s third pause in operations. If there’s another, investors shouldn’t expect a resumption of service until calendar 2021.
I happened to read a rather funny statement in the comments section after a June 23 Zacks Equity Research article about CCL’s extension of the suspension.
“Cash burn of $650 million against $7.7 billion worth of cash is not really all that bad, At that rate, they could hold out for (about) 6 years with zero income, and we know that isn’t going to happen. Overall, while I think the whole industry has taken some serious hits, they are only black eyes as opposed to a crushed sternum,” wrote someone named Eric.
This person might be the same person investing in Hertz (NYSE:HTZ) stock.
Eric, if you’re reading this, the $650 million is per month, not per year. About 51% of its cash will be spent by the end of November. At the current burn rate, it has approximately 12 months of cash available.
So, yes, it’s not in “going concern” danger, but like all of its peers, it’s not building billion-dollar ships for them to be docked 24/7, 365 days of the year.
They’ve got to get back out there. And fast.
Why Buy CCL Stock?
In early June, I wrote about director Randall Weisenburger’s $10 million purchase of CCL stock. The long-time director bought 1.25 million shares at $8 a pop. Even with a 12% drop in its stock price due to a 2.7% correction in the S&P 500, Weisenburger’s still sitting on a 99% return on investment.
Annualized, that’s an almost 600% return. I’ll take that every day and twice on Sundays.
What do you think the odds are that Weisenburger didn’t check the analyst estimates before making his big bet on Carnival stock? I’d say pretty darn high.
I get that analysts have a job to do, and it’s a tough one at that, but in situations like Carnival’s currently sitting, you have to wonder why they bother. It’s like trying to throw a ball from the open hatch of one plane to another at 35,000 feet.
Is CCL a buy?
I still say single digits, as the director did, is the only way to play this. Until then, keep your powder dry.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.