I would love a cruise. But I prefer to live. It’s this kind of thought process that has made Carnival Cruise Lines (NYSE:CCL) a battlefield stock over the last month.
Right now, bulls are winning. Carnival opens for trade June 17 at about $20.42 per share, after jumping more than 5% on Tuesday. That followed a plunge of 30% the previous trading week.
Traders see resistance at $44.50, and support at $12.29, meaning views are wildly divergent. On TipRanks there are three analysts saying buy, four saying sell, and eight with no clue at all. The average price target is $16.13, a 20% move down.
Carnival started 2020 trading at over $50. That means it has lost 60% of its value this year. In a normal year Carnival would have $20.8 billion of revenue and bring nearly 15% to the net income line.
But this is not a normal year. The question is whether a normal year is on the horizon.
The Bull Case
Bulls insist there is enormous pent-up demand for cruising.
After announcing in May that it would restart sailing in August, Carnival bookings tripled compared to the previous year over a three-day period. The current plan is to start short sailings from Port Canaveral, Galveston, and its headquarters in Miami
Analysts love Carnival for its sheer size. The company owns several lines including Holland America and Cunard. Its Carnival ships are the industry’s largest. If there is a shakeout, bulls say it will be smaller lines that get shaken out.
All this is possible because, while many people didn’t want cruise lines bailed out, they were. The Federal Reserve’s decision in March to flood the market with money let Carnival raise $6 billion at yields of about 12%.
The Fed’s recent decision to buy corporate bonds directly means those bonds are still attractive to private equity speculators. Analysts believe those bonds have bought Carnival nine months to wait out the virus storm.
Despite Canada canceling the rest of Carnival’s summer season, analysts at Stifel have upgraded the stock, with a price target of $30/share.
Cruise executives also note North America isn’t their only market. Asia and even Europe are starting to open up, delivering much-needed cash.
The Bear Case
The bear case is based on that ticking clock and the rise of novel coronavirus cases this summer.
While Carnival’s big “party ships” may start sailing in August, smaller lines catering to older passengers are pushing back start dates.
The recent downdraft in Carnival’s stock price was built on the belief that a massive second wave of the virus will force a renewed shutdown.
Meanwhile, some 42,000 crew from various lines remain trapped on their ships, and they’re not being paid. Caribbean nations are re-evaluating their relationships to the cruise lines, after finding repatriated workers had the virus. Carnival has had to be creative in getting people home around restrictions.
All those Princess Cruise ships that became “ships of death” early in the lockdown? Princess is a Carnival line, too, and the company now faces a class-action suit.
The Bottom Line on CCL Stock
As with other companies in the travel business there’s a final bailout available to Carnival, bankruptcy. In that case, common CCL stock holders would be wiped out, bondholders would take just a portion of what’s owed, and expenses would be rationalized.
The risk of bankruptcy is behind the 12% yield on the bonds Carnival sold in April, bought by private equity, which still hopes the Fed will buy them out and guarantee payment.
If you’re still playing the common stock, however, you’re playing without a net. If there is an autumn lock-down, and cruises can’t restart until next spring, I don’t think you’re getting a dime for your shares.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
