Can Carnival Corp. (NYSE:CCL) stock survive the stormy waters of a global pandemic?
That’s the fundamental question facing current and prospective investors in the world’s biggest cruise line operator. And four months into the novel coronavirus pandemic, things aren’t looking up for the badly battered cruise line industry.
As President Trump said recently, the pandemic and its impacts on the U.S. economy are likely to “get worse before it gets better.”
This is especially true for the cruise line industry, which has been suspended for close to five months now with no end in sight. The Centers for Disease Control and Prevention (CDC) extended its “no sail” order for U.S. cruises from July 24 to Sept. 30. From March 1 through July 10, there have been nearly 3,000 cases of Covid-19 and 34 deaths on cruise ships, according to the CDC.
Conservative estimates back in March when Covid-19 first reached American shores was that the respiratory disease had cost cruise lines $750 million in lost revenue. Now, heading into August, the losses are running into the billions of dollars.
In June, Carnival reported a record $4.4 billion quarterly loss as the pandemic crippled the cruise operator and forced it to take major write-downs on the disposal of several redundant ships.
The steep and sustained downturn for Carnival, and the industry as a whole, is especially painful when you consider that, until this year, cruise lines were the fastest growing segment of the global travel industry. Accounting firm KPMG recently released a study that showed demand for cruise lines increased 20.5% in the past five years and that the cruise line industry was worth a combined $150 billion annually pre-pandemic, with Carnival the largest player.
Now, many cruise operators will be lucky to survive until there is a vaccine widely available. Will Carnival be one of the survivors?
Burning $650 Million a Month
During a June conference call with analysts, the Doral, Florida-based company noted that it had reserves of $7.6 billion at the end of May, but was burning through $650 million while waiting for regulatory approval to resume services. Hopes to restart operations in a phased approach over the summer months have now faded and Carnival has been forced to sell six of its flagship vessels.
Making matters worse, Carnival also revealed that it incurred a $2-billion loss on the sale of the six ships due to the difference in the sale price and their book value.
Carnival has also drawn down a $3 billion credit line and issued $6.6 billion in bonds and equity as it struggles to stay afloat. The company is now exploring all options to get further waivers on debt repayments that are due next year, without which management says it could breach some loan conditions.
The turmoil has seriously depressed CCL stock, sending it down 73% from a high of $51.94 before Covid-19 to $14 per share today. While other stocks have rebounded from March lows, and some have thrived amidst the worldwide pandemic, CCL’s stock price has continued to languish, especially since reporting its record quarterly loss in June.
Analysts aren’t putting much faith in the company right now. Among 21 polled investment analysts, the consensus view is to hold CCL stock, with a growing number of analysts switching their ratings to “sell.” There is currently only one “buy” rating on the stock.
In addition to selling ships, restructuring debt, drawing down credit lines and hoarding cash, Carnival has also laid off more than 1,000 workers, enforced a 20% pay cut for remaining employees, and slashed the annual salary of CEO Arnold Donald by 50%. In total, Carnival has slashed $7 billion in annualized operating expenses. This begs the question of what else can the cruise line operator do while it waits for permission to begin operating again?
Deals, Deals and More Deals
One way in which Carnival is fighting to remain a going concern is by pre-selling cruises for 2021 at deeply discounted prices. With prices on many future cruises slashed by as much as 50%, Carnival has reported that bookings for next year are “within historic ranges,” and that 60% of bookings for 2021 are new ones, while the other 40% are the result of customers rebooking trips through credits given to them because a trip was cancelled this year.
The positive future bookings represent a small ray of sunlight in what has otherwise been a perfect storm for Carnival and other cruise line operators.
However, even if the public is willing to again board a cruise ship, the question remains on when Carnival will be given permission to take to the seas again? Donald says the company is implementing a raft of new safety protocols to prevent future disasters.
That’s to avoid cases like this spring’s incident with Covid-19 on Carnival’s Diamond Princess ship, when nine people died from the virus. Many passengers were tweeting their experience aboard the Diamond Princess in what turned out to be a lesson in bad public relations.
However, new safety measures won’t be enough if Carnival’s ships never leave their docks.
The Bottom Line on CCL Stock
Management at Carnival Cruise Lines has been doing their best to right the ship during an unprecedented time. The challenges facing the company are not of their making or within their control. While a lot of necessary steps have been made to help the company weather the current storm, the reality is that, until regulators grant Carnival permission to set sail again, the company, and its stock, remain grounded ashore.
For this reason, investors should steer clear of CCL stock until the pandemic is behind us and Carnival is able to navigate calmer waters.
As of this writing, Joel Baglole did not own shares in any of the aforementioned companies.