Last month, I called Carnival (NYSE:CCL) stock a “bottom-fisher’s buy.” But now, shares may be getting ahead of themselves.
As Wall Street prices in a rapid recovery, hard-hit stocks are seeing a boost. Granted, the cruise line giant hasn’t rallied as much as say, airline stocks. Yet, that doesn’t mean shares are a screaming buy at today’s prices.
How so? For one thing, valuation. As our own Matt McCall wrote May 29, it’s hard to value a business that’s seen its revenues evaporate. Also, factor in continued cash burn, and uncertainty regarding a second novel coronavirus wave. In short, you can’t really call this stock cheap or expensive.
Investors may see how shares fell 70% from past highs and assume that makes it “deep value.” But, with the underlying economics of the cruise line business altered, what’s to say we’ll ever see that high-water mark anytime soon?
Secondly, liquidity is still an issue. Even after a recent equity raise and debt offering. Add in tough times economically, and the factors at play do not make shares look like a screaming buy. On the other hand, it’s far too late to go short this name. Odds are shares could rally higher, rather than dip lower.
Even then, the chances of Carnival stock treading water seem the most likely. With this in mind, all signs point to this being a name you should avoid for the time being.
V-Shaped Recovery? Not So Fast!
As I mentioned above, investors are looking for big potential gains in hard-hit stocks. Be it airlines, casinos, or even retail, stocks affected by coronavirus could head substantially higher, assuming we see a swift recovery from today’s headwinds.,
But, are investors wearing rose-colored glasses, as economic realities are much more bleak? It’s safe to say Wall Street and Main Street are not on the same page.
So, how does this impact Carnival stock going forward? Investors have been positive, but not enthusiastic, with the stock as of late. Shares have more than doubled from recent lows. Yet, it could be a while before they rally back to $20 per share and beyond.
Why? For one thing, it doesn’t matter if things are starting to open up from coast-to-coast. It’s going to be a while before cruise lines can set sail again. Carnival plans to resume operations Aug 1, shortly after the CDC’s “no sail” order expires.
Granted, August is not that far away. But, it does mean continued cash burn, estimated by Bank of America analysts to be around $1 billion per month. Also, what’s to say demand will be sufficient to reduce losses completely?
The cruise industry has touted strong demand if and when ships set sail again. A majority of travelers have opted for rainchecks in lieu of refunds. But that doesn’t mean sufficient passenger traffic is going to return this year.
And it’s not just the high risk of continued depressed demand. The high levels of expensive debt also make Carnival a less-attractive prospect.
Expensive Debt a Big Red Flag For CCL Stock
As InvestorPlace’s Dana Blankenhorn wrote last month, Carnival had to pay a pretty penny for liquidity. Not only from borrowing at rates in the double digits. But also, diluting shareholders via a share offering.
Sure, their odds of surviving coronavirus went up with this capital raise. But it may hurt the stock going forward. High interest rate financing could mean a higher hurdle for the company to climb as it tries to bounce back to profitability. Dilution reduces how much shares could recover – if and when the underlying business returns to normal.
In short, I’m doubtful shares can retrace past highs. Granted, they could move much higher from today’s prices. But, it’s a longshot to buy CCL stock at around $16 per share, and assume it’ll hit $50 per share within a year or two.
Also, this particular cruise stock may not be your best way to bet on a rebound. Previously, I saw larger Carnival as the best of the bunch. Yet, many analysts prefer Royal Caribbean (NYSE:RCL) as the stronger rebound play. In other words, RCL, or even Norwegian Cruise Line Holdings (NYSE:NCLH), could be a better opportunity.
The Bottom Line on CCL Stock
Stocks affected by the coronavirus offer the potential for big gains, if you’re willing to gamble on a V-shaped recovery. Yet, given how investors are looking to price-in a recovery ASAP, being too cautious may mean you miss the boat.
Still, that doesn’t make CCL stock a strong opportunity. Stay on the sidelines with this beaten-down stock.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
