Amid more signs that demand for going on a cruise is nonexistent and isn’t coming back anytime soon, the outlook of Carnival Cruise Lines (NYSE:CCL) and CCL stock remains quite poor.
On June 17, Norwegian Cruise Line (NYSE:NCLH) announced that it would cancel most of its scheduled cruises through Sept. 30. It also decided to forego six cruises in October. In May, the company had announced that it would resume cruising in August.
Even more ominously for CCL stock, as of June 17, the CDC’s website stated that “we don’t have enough information at this time to say when it will be safe to resume sailing with passengers.” The section of the website in which the statement is contained was updated on June 14.
Not surprisingly, when Carnival reported its Q3 results on June 18, it stated that it could not predict when it would resume offering a significant number of cruises.
The CDC’s statement indicates that the agency not close to suggesting that Americans can go on cruises again. As long as the CDC effectively recommends against taking cruises, I’m sure that very few if any Americans will take them. And Norwegian’s decision to cancel almost all of its scheduled cruises shows that demand for cruises is indeed extremely weak.
A Closer Look at CCL Stock
I continue to believe that demand for cruises will be extremely low until either the novel coronavirus disappears entirely or a vaccine for the virus is widely distributed.
As I’ve stated in the past, many people have read about the terrible ordeals that those trapped on cruises during the early days of the coronavirus crisis endured. Further, it’s easy for consumers to find vacations that include much less contact with large groups of people than cruises.
On June 17, the company disclosed that it had “$7.6 billion of liquidity” and was “burning about $650 million a month,” according to Barron’s.
But importantly, Carnival reported that, as of May 31, it was holding $2.9 billion of deposits from its customers. I think that, as the cruise moratorium continues through the summer and fall, most customers will ask for their deposits to be returned.
If Carnival is counting the deposits as part of its liquidity, and it has to refund $2 billion of the deposits, that means its liquidity is actually $4.6 billion. If its cash burn rate stays at $650 million per month, it can only stay solvent for 14 months after May 31.
WHO Chief Scientist Dr Soumya Swaminathan recently predicted that there would be 2 billion doses of a coronavirus vaccine by the end of 2021. Assuming that older people and those with preconditions will get access to a vaccine first, most healthy people in their 50s and younger may not get a vaccine until the end of 2021.
Although I think that the virus is likely to be extremely weak and largely a non-factor in society as a whole by next spring, there’s a possibility that a majority of people will still be afraid to reserve cruises in July 2020, when Carnival’s cash is slated to run out.
Also, it will take time for Carnival to collect reservations after rescheduling its cruises, and it will need time to hire and rehire workers. So even if demand returns in June 2021, the company may not be able to realize revenue quickly enough to stay solvent.
The Bottom Line on Carnival Stock
The economy as a whole is likely to be doing much better six months from now, so it’s possible that the Fed will have pulled back its bond-buying by that time. As a result, Carnival could have trouble raising enough money to stay solvent.
Demand for cruises obviously is completely dormant, and it may not revive before Carnival’s cash runs out. Consequently, I continue to recommend that longer-term investors avoid the shares.
As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry 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 airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.
