Of all the sectors stricken by the effects of the novel coronavirus, the cruise line sector and, specifically, Carnival Corporation (NYSE:CCL) face the most unknowns. The company posted preliminary second-quarter data on June 18 that added to the selling pressure in CCL stock.
It comes into the final trading days of the second quarter down more than 17% from that preliminary news. What might investors make of Carnival’s quarter?
Preliminary Q2 Hurts CCL Stock
Carnival posted a preliminary net loss of a massive $4.4 billion or a loss of $6.07 per diluted share. Without a $2.0 billion non-cash impairment charge, Carnival lost $3.30 a share. Revenue fell to just $700 million, compared to $4.8 billion.
The absence of cruise operations hurt results but the unknowns ahead should shake out Carnival shareholders. Still, those sitting on a paper loss might want to do nothing for now. Once the company returns to partially normal operations, losses will shrink. The rebound depends entirely on health regulators approving cruise ship operations.
Carnival ended the second quarter with ample cash of $7.6 billion. Bankruptcy risks are minimal. Looking ahead, demand could snap back. The company wrote that “for the full year of 2021, booking volumes for the six weeks ending May 31, 2020, were running meaningfully behind the prior year. However, the company saw an improvement in booking volumes for the six weeks ending May 31, 2020, compared to the prior six weeks.”
The company could benefit from a surge in bookings as restrictions ease and worldwide infections of the coronavirus moderate.
We are not there yet. Still, if the U.S. finds a way to minimize the spread of the virus, limits placed on the tourism industry will lessen.
Headwinds from Competitor
Norwegian Cruise Line’s (NYSE:NCLH) announcement that it would extend the suspension of voyages through October is also a headwind for Carnival. Norwegian said it is working with the U.S. Centers for Disease Control and Prevention to “to take all necessary precautions to ensure the health, safety, and security of guests, crew and the communities visited.”
Investors playing the long-term prospects of Norwegian or Carnival may bet on cruise line discounts of more than 70% spurring demand. If bookings fill and are sold out, stocks in these sectors could bounce back to pre-Covid-19 levels in a hurry.
The voluntary suspensions of all trips out of U.S. ports until Sept. 15, 2020, is another headwind for Carnival. The Cruise Lines International Association said that “although we are confident that future cruises will be healthy and safe, and will fully reflect the latest protective measures, we also feel that it is appropriate to err on the side of caution to help ensure the best interests of our passengers and crewmembers.” Now that Carnival will not reopen on July 15, the stock is at risk of selling pressure in the weeks ahead.
Investors need to evaluate the cash burn risks and the additional credit line that Carnival needs to stay in business. And if health regulators prohibit trips from the U.S. beyond September, Carnival’s losses will mount.
Valuation Requires Huge Earnings Growth
Carnival has a fair value of almost $33, according to simplywall.st. But that depends annual earnings growth more than doubling over the next one to three years. Cautious investors will want to plan for a delay in cruise trips, which would lower the future growth expectations. On Wall Street, 18 analysts forecasting the fair value of Carnival also have an average price target of $16.71 (data from TipRanks).
Better clarity on the business re-start will give CCL stock a strong lift. But for now, Carnival is still a risky investment despite the stock’s impressive rebound from the $7.80 low set in April 2020. The business recovery schedule is unknown. It depends entirely on the U.S. and its ability to moderate the spread of the virus, increase testing, and continue the trend of falling death rates. If the country finds a balance between public safety and a reopened economy, Carnival is set to re-start businesses in the early Fall.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
As of this writing, he did not hold a position in any of the aforementioned securities.