Carnival Corp. (NYSE:CCL) stock is ready for a comeback after losing a lot of steam due to the novel coronavirus pandemic. As the company readies itself to set sail on Aug. 1, the markets are reacting positively to general optimism surrounding coronavirus vaccines.
That’s great news for a stock that dipped 80% in the first three months of 2020. But there are other reasons why I am bullish on this stock, and they have little to do with the general state of the economy.
Carnival has raised a lot of capital since the start of the pandemic. President Donald Trump and his administration were quite keen to bail out the airline industry. However, cruise lines did not receive the same level of warmth because many of them are based overseas – as is the case with Carnival Corp.
That left the British-Panamanian cruise operator with few options but to tap the debt and equity markets to fuel its operations. Management went into overdrive and amassed a war chest of $6 billion to see it through the crisis.
Considering the robust liquidity situation, I do not foresee Carnival running into any issues vis-à-vis cash burn. Indeed, its stable position leads me to believe it is ready for a bull run when the economy starts humming again, and cruises are back at sea.
But the recovery will be a slow one, and general skepticism regarding cruises will keep profits at bay for the next couple of years.
A Realistic Picture of the Economy Emerges
Let’s get real, folks. With half the world still in lockdown no one should expect cruise lines to have a bumper year in 2020. The first-quarter earnings report laid out some sobering statistics regarding where the company stands at the moment.
Earnings per share came in at 22 cents per share, missing analyst estimates by 10 cents. Revenues painted a better picture, beating analyst estimates by $157.56 million, finishing at $4.79 billion for the quarter. Carnival also pulled guidance for the rest of 2020, owing to the uncertainty caused by the pandemic. In this environment, it’s tough to make accurate financial forecasts, so the move is an understandable one.
Analyst estimates do indicate that there will be a recovery by next year, but these projections are fluid and subject to change. As Dr. Anthony Fauci, the head of the National Institute for Allergy and Infectious Diseases, said when speaking with CNN: “You don’t make the timeline, the virus makes the timeline.”
Just a minor note here, the fiscal year for Carnival ends on Nov. 30, while for the rest of the companies, it ends on Dec. 31.
Cash Flow Is Not an Issue
Carnival is headquartered in Miami but the company is incorporated in Panama. That’s why it is not eligible to receive support under the CARES Act. Management understood this predicament and decided to shore up its balance sheet. I wouldn’t say the capital raised is cheap, but having enough cash to survive the crisis is essential.
However, the markets were unrelenting when the company launched its equity offering of $1.25 billion worth of its common stock in March. At the same time, Carnival also launched offerings of $3 billion in senior secured notes due 2023 and $1.75 billion in senior convertible notes due 2023.
Shares traded 20.1% lower in premarket trading as a result of the announcement. The market reaction notwithstanding, there wasn’t much Carnival could do here. It needs cash to see it through the end of this crisis and remain solvent.
In addition, it’s worth noting here that Carnival did not have a highly leveraged balance sheet going into this crisis. In comparison, Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH) already had a significant amount of debt on their books. The current crisis exacerbated the situation for both these companies and several others in the sector. However, with a debt-equity ratio of 0.59 in its most recent quarter, Carnival was in a much better position to use debt as a capital source.
Safety Measures Will Become a Key Performance Area
Health and safety will be a key area that every cruise line will have to focus on moving forward. Due to the nature of cruises, diseases are more likely to spread quickly onboard due to the proximity of travelers and the time spent together.
Just recently, a class-action lawsuit was filed against Princess and Carnival cruise lines, alleging the carriers helped spread Covid-19 among passengers. The plaintiffs allege that Carnival cruises are associated with over 1,500 positive Covid-19 infections and almost 40 deaths.
The lawsuit highlights how vulnerable Carnival and other companies in the space have become due to Covid-19. Countries like Australia and Canada have already announced enhanced restrictions for cruises that will stall their comeback in these destinations. Considering all these developments, Carnival will have to dedicate a significant chunk of time and effort to health and safety regulations.
CCL Stock Valuation
On a trailing 12-month basis, CCL stock trades at a price-earnings ratio of 6.8 versus an industry average of 20.3. That’s a discount of more than 65% discount to the industry. Meanwhile, shares of competitor RCL trade at a P/E of 65.6, showing you just how reasonably valued the stock is in comparison to peers in the industry.
Refinitiv data predicts the stock to land at $17.60 per share in 12 months’ time. I think that’s a pessimistic analysis, considering that CCL stock is up almost 60% over the last month. But it tells you that analysts do not expect a huge bounce in the foreseeable future.
The Final Word on CCL Stock
As I mentioned earlier, it’s understandable why CCL stock lost so much value this year. Covid-19 hit the cruise line industry hard and uncertainty still looms large over the industry. However, U.S. fatalities are falling and Pfizer (NYSE:PFE) CEO Albert Bourla recently told The Times of Israel that a coronavirus vaccine could be ready by October.
However, things will be tough for Carnival and the rest of the cruise line industry for a few years. It will take time for passengers and the companies to adjust to the new normal. The sector will have to change and Carnival will lead the way in that regard.
If you have this stock, I would not recommend shorting it but no need to expand your position by a great sum until we have a clearer picture in six months.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
