After trading in a steady but consistent uptrend between March and May 2020, Carnival (NYSE:CCL) stock unexpectedly rose 37% in the last week. Investors poured into airline, hotel, and cruise ship stocks, speculating that the end of the shutdown will lead to higher tourism spending.
Investors with an investment time horizon of between two to five years may buy CCL stock at any price. So long as Carnival remains solvent, which is highly likely, and cruise ship bookings increase steadily, the stock will reward investors who bought in the $7.80 to $15 range.
CCL Stock Rally Gaining Momentum
Carnival’s stock rebound began ever since the stock bottomed at $7.80 in April. Buying momentum picked up on May 26 as investors grew more confident that the lockdown would permanently end. The steady increase in airline passenger traffic is a precursor for cruise ship companies recovering. As tourists grow more comfortable in traveling by plane, their interests in going on a cruise will increase, too.
After spending over three months confined at home, for the most part, travelers will have a strong appetite for the ease and convenience offered from the cruise line. But in the near term, Carnival needs to comply with the No Sail Order issued by the Centers for Disease Control and Prevention in April. This is in effect until July 24.
Carnival is not out of the woods yet: the CDC could extend this order again. Still, customers may merely delay their 2020 bookings into 2021. This would set a sharp revenue re-acceleration for Carnival.
Fair Value for CCL Stock
The majority of the 14 analysts have a “hold” or “sell” recommendation on Carnival. The average price target is just $14.42 (per Tip Ranks). Conversely, Carnival has a high value score because of its low price-sales and price-book ratios:
| Stock | Industry | S&P 500 | |
| Value Score | 54 | 43 | 73 |
| Price-Earnings | – | 38.8 | 27.5 |
| Price-Sales | 9 | 7.3 | 2.3 |
| Price-Free Cash Flow | – | 39.2 | 21.9 |
| Price-Book | 15.6 | 5.4 | 3.8 |
Data courtesy of Stock Rover
Given the deep value in this cruise ship stock, investors should have expected the rebound that took months to build. In this five-year discounted cash flow revenue model, investors may apply a conservative 2.3 times terminal revenue multiple:
| Metrics | Range | Conclusion |
| Discount Rate | 9.5% – 8.5% | 9% |
| Terminal Revenue Multiple | 1.8 – 2.8 | 2.3 |
| Fair Value | $13.57 – $35.82 | $24.48 |
Data courtesy of finbox
This would imply a fair value of $24.50. Conversely, the longer the CDC delays the re-opening, the more money Carnival will lose while idling its ships.
Other Risks for Carnival
Carnival and the other companies in this space, namely Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH) will continue to report big losses in the near term. All of these firms need global infection rates of the coronavirus to fall. Declines in the U.S. and Europe are critical before regulatory firms allow them to operate again.
Carnival cannot afford to keep waiting until 2021 before sailing again. Still, bankers and bondholders will gladly lend more money to the company to keep it afloat (pun intended). And investors buying Carnival stock are willing to support the company as it speculates on the business recovering.
Investors with a multi-year time frame should continue holding Carnival. The travel industry as a whole has too much to lose if cruise line operators halt operations for too long. Besides, the markets are more certain that the economy is on a slow recovery as countries gain more control over containing the virus spread.
The new normal will involve social distancing and constant disinfecting. But during the shutdown, the cruise line industry prepared itself to accommodate such a way of life.cc
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities. Chris is on twitter and runs the DIY Value Investing Marketplace guide.
