Cruise stocks have witnessed a sharp rebound since bottoming out in mid-March. The snapback comes on the back of effective liquidity measures taken by cruise companies, loosening of travel restrictions, and positive indications on rebooking rates. Shares of Carnival Corporation (NYSE:CCL), the global leader in the cruise line industry, have witnessed a 170% increase in its stock price from its lows in April. August bookings have surged 200% from the same period last year, which has contributed to the recent rally in the CCL stock.
However, analysts remain skeptical of the long term potential of cruise stocks at this time. Jamie Rollo at Morgan Stanley downgraded shares of the three major cruise lines, including Norwegian Cruise Line (NYSE:NCLH), Royal Caribbean (NYSE:RCL), and Carnival, to an “underweight” bearish rating. Rollo forecasts a bumpy three years for cruise lines and estimates negative earnings until 2023.
As an investor, you would be tempted to dabble in short-term trades for CCL stock, but that’s pretty much it at this point. Cruise line stocks are risky bets, with the economy in the doldrums and the novel coronavirus still at large.
Even though lockdowns have been lifted in few places, inessential travel will continue to be discouraged. Additionally, with no revenues for the next few months, the daily cash burn is constricting financial flexibility in a massive way.
Let’s dive a little deeper into Carnival’s situation to have a clearer picture of whats going on.
“Based in a Different Country”
The CARES Act is nothing short of a blessing for companies having trouble staying afloat in these disastrous times. However, the U.S. government announced that it would only bail out companies that are incorporated in the country. President Donald Trump targeted cruise companies for being incorporated outside the USA, stating that it’s “very tough to make a loan to a company when they’re based in a different country.”
With that being said, Carnival faces an uphill challenge to raise liquidity through equity and debt, along with effectively managing its financial flexibility to control the daily cash burn.
Carnival currently has a considerable amount of leverage on its balance sheet. As of February, it had $1 billion in short-term debt, $2.2 billion in the current portion of long-term debt, and $9.74 billion in long-term debt. On the flip side, its total equity was $24.29 billion, which takes its debt/equity ratio at a reasonable 0.57 times. It’s cash and cash equivalents are enough to offset its short-term debt. Additionally, long-term debt maturities spread out over the next ten years.
At the same time, the company has been aggressively raising more liquidity through the debt and equity markets. It has raised approximately $6.45 billion through senior and convertible loan notes and $500 million from the sale of 62.5 million shares. The majority of these shares were purchased by the Public Investment Fund, which is the sovereign wealth fund of the Kingdom of Saudi Arabia. Moreover, the company’s director, Randall J. Weisenburger, has also purchased an impressive 1.25 million shares.
Therefore, it’s safe to say that it won’t be going bankrupt any time soon. However, the daily cash burn is being estimated at around $6 billion for the next 12 months, and if revenues do not return to some normalcy, things could get tricky.
Valuation
CCL stock has been enjoying a surge in its price of late, and investors are intrigued where the stock could potentially end up. However, analysts believe that the average price for the CCL stock should be $17.60, which means that it is overvalued by 22% against its current price of $21.50.
The spread, though, is more than double its current price, which suggests that there is considerable volatility at this time. However, its trailing PE ratio is significantly lower than the S&P 500 index and the cruise lines industry.
The trend is consistent across all the valuation metrics, including the forward PEG and price to sales ratios, which suggests that CCL stock is undervalued. Whichever you want to look at it, though, it seems that the market could correct itself, given the immense volatility at this time.
The Future
With the pandemic, the cruise industry was brought to a stand-still without any clear vision for recovery. Carnival and other cruise line companies are hopeful that they could sail the seas again once the ports start reopening. The positives are that demand is picking up again, but I suspect that only the younger demographic would be interested in sailing the seas at this time.
Industry experts expect a shift in the business model for the tourism industry. Medical protocols are likely to increase, which will further add to the cost burden. Sterilization robots, crew-manned serving stations, and other related technologies may soon become a reality for the industry. Naturally, these changes will require substantial investments by companies who can embrace the change.
Final Word on CCL Stock
Investing in CCL stock is a gamble at this stage, particularly if you have a long position on the stock. You could rake in short-term profits with the recent rally, but I expect that to be short-lived considering the challenges it faces at this time. Demand appears to be rising again, but it would take a long time before revenues can return to the level they were last year. Therefore, I am bearish about CCL stock’s prospects.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned
securities mentioned above.
