Carnival (NYSE:CCL) won’t be sailing any cruises until at least the fourth quarter or so, according to its website. To put it bluntly, CCL stock is going nowhere until the public knows for sure that sailing will happen. Until then, the company is burning at least $650 million per month.
So that presents two problems to the investing public. What is the probability that sailing operations will start any time soon? And, what level of liquidity is going to be needed?
I believe there is a declining chance that operations will start in the fourth quarter. Simply put, there may be no way to begin operations on a cruise without a vaccine readily available.
So that answers the second question. The company may need to have enough liquidity to last into mid-2021. Right now, Carnival had $7.6 billion in liquidity as of May 31, according to its earnings release this week. The company estimates that it will burn $650 million each month. Something has to be done to raise its liquidity.
Uncertainty Over Debt or Further Equity Dilution
Let’s do the math. First of all, $650 million could technically last 11.7 months. But things won’t actually occur that way. At least two to three months before the company runs out of money, the company starts to have a clear fiduciary obligation to its creditors. It then likely will file Chapter 11. So, in effect, the company really only has at most nine months of liquidity.
That would cover cash burn until the end of February. But here is the thing. If they actually wait until then to raise cash through asset sales, equity offerings or debt placements, the market would smell blood. In other words, the pricing would reflect a distress seller situation.
For all intents and purposes, the company has to start raising cash now over the next three months. It can sell assets or raise debt or equity. None of those options will make CCL stock rise. The stock price will likely start to reflect this fact fairly soon.
For example, equity investors will not like the prospect of getting diluted through a new share offering. That puts selling pressure on the stock. Then, if the offering price is set, it will likely be at a discount from today. That guarantees dilution to its existing shareholders. This is also a negative factor.
Lastly, if the company raises debt, that hikes up the company’s interest costs. It also implies to investors that cash burn will continue longer than expected.
What to Do With CCL Stock
Barron’s reported this week that a Wells Fargo analyst, Timothy Conder, wrote a report expecting a capital raise of $4 billion to $5 billion. Condor wrote that Carnival would then have enough liquidity to last until the end of November 2021, its fiscal year-end.
That is similar to what I estimate. For example, if Carnival needs to fund an additional seven months at $650 million, the cost would be $4.55 billion.
This amount of debt, plus the dilution and cash burn is going to put severe pressure on CCL stock. More importantly, it implies that Carnival won’t have any cash flow until November 2021. That makes setting a price target above today’s price very difficult.
Of course, all of that could be moot, if, in fact, the company gets the go-ahead to begin sail operations early in the fourth quarter. However, I put the probability of this very low. That will be the case until there is a Covid-19 vaccine available for cruise ships. They may want it to administer on board or require that all people have prior to boarding.
So, if you are looking to buy CCL stock, first decide the probability of Carnival starting operations in Q4. Then also decide whether any additional capital might push the stock down.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
