It appears Carnival (NYSE:CCL) might be finding support after a tumultuous six months, as the market tries to digest the future for the travel industry. Based on comments by Federal Reserve Chairman Jerome Powell, it appears monetary policy will continue to accommodate lenders for an indefinite period of time. This bodes well for CCL stock.
At fiscal year-end, Carnival’s stood at 2 times debt-to-EBITDA, and the terms of new bond covenants require it keep that ratio under 3. On April 1, the company issued $4 billion in first-priority senior secured notes due in 2023, $1.75 billion in senior convertible notes due in 2023, and 500 million of common stock at $8.
It appears that the market took that news on the chin, as the stock rallied after, nearly hitting $25 on June 8.
The end of the Centers for Disease Control and Prevention’s no-sail order will depend on whether the current declining trajectory of Covid-19 remains on track. But there has been some vote of confidence from consumers.
In the company’s most recent 10-Q, it reported at least 40% of deposits for canceled cruises have been rolled over into future departures.
Looking Ahead for CCL Stock
The key to the future of the cruise industry is whether or not the worst of the COVID-19 outbreak is behind us.
Thus far, several states that were not hit as hard have reopened, and major states in the northeast that were hit hard, have gone to phase 1 of reopening. There are also signs of hope as possible vaccines from Moderna (NASDAQ:MRNA) and others progress in their testing.
According to the U.S. Census Bureau, April saw a 16.4% decrease in retail sales in April. On the good side, it could have been worse. On the bad side, if this is a sign of things to come, and lower-end jobs do not recover, households might find it hard to see cruises high on the list of priorities.
Carnival hasn’t left their entire future to chance. CCL stock has charted a course back to profitability through aggressive discounting. They are offering no-stress cancellation options for cruises, and seem to be aggressively sacrificing margin to tread water.
Carnival will also take a number of safety and expense cutting initiatives, which will help the stock.
The company will follow CDC recommendations to raise consumer confidence. They will take the temperatures of all of those on board.
CCL further stated, they would be “working together with Cruise Lines International Association (CLIA) and public health agencies around the world, including the Vessel Sanitation Program (VSP) and the Centers for Disease Control and Prevention (CDC), who assists the cruise ship industry to prevent and control the introduction, transmission and spread of infectious illnesses on cruise ships.” These measures should set some vacationers’ minds at ease.
A leaked audio recording revealed that the company might be looking at eliminating self-serve buffets as well when sailing begins again. Health considerations might be the impetus of this move, but it will also reduce waste, thereby helping to lower expenses.
Along with addressing food cost, the company will also lower headcount. That’s important given that, because most of Carnival’s 120,000 employees are not U.S. Citizens and the U.S. operation is incorporated in Panama, there is no relief coming from the U.S. government. There will be some layoffs and pay cuts, even following their recent furloughs.
As we slowly inch toward whatever “normal” looks like going forward, it will be survival of the fittest. Earlier this month, Norwegian Cruise Lines (NYSE:NCLH), let out that it has “substantial doubt” about the company’s ability to survive the year. But its fears abated after an oversubscribed capital raise.
This bodes well for Carnival in 2021, given it expects the most recent capital raise will maintain solvency even if they don’t see a lift of restrictions.
Bottom Line for Carnival
Of the 10 analysts weighing in, the average estimate for next quarter’s EPS is a negative $1.54 per share, with a range from a high of $2.18 to a low of -$2.79 per share. Average estimates are night and day.
The average analyst recommendation on CCL stock is a “hold.” Perhaps the pessimistic view of the world is simply a reflection of the hospitality industry as a whole, borrowing worry from tomorrow. If the worst is over, then it will be a steal at 5.9 times earnings. However, if we see a second spike of Covid-19, trying to catch falling knives would seem foolish.
As of the time this article was written, I did not own shares in Carnival.
