Carnival (NYSE:CCL) released its Q2 earnings and balance sheet ending May 31 last week. The key takeaway is that CCL stock will not move higher until the company starts sailing or it can reduce the cash burn rate.
The bottom line is that Carnival has $6.9 billion in cash but expects to burn $650 million per month during the second half. Simple math shows that it has basically three quarters of liquidity left.
In reality, the company will have to either dramatically reduce its burn rate or raise more cash well before the middle of next year. This is because no company will ever be able to raise money at quasi-normal rates if they have less than three to six months of liquidity left. Banks and investors would charge usurious rates if they suspect the company is out of options.
The CDC has a no-sail order out until July 24. Barron’s wrote today that they expect the no-sail order to be extended. Carnival does not expect to sail out of the U.S. until after Sept. 15. However, the company has recently announced, according to an analyst on YouTube, that it will be delaying cruises out of Fort Lauderdale from November 2020 to March 2021.
More Bad News Coming
The truth is that the company will have to raise more debt. This is likely to hit CCL stock from its present stock price of about $15 today (July 15). Investors don’t want to see their company take on more debt, which likely signifies higher losses.
Not all analysts are as negative on the stock. Barron’s just reported that Stifel came out with a positive report on the stock, setting their target price to $24. The report was deemed positive, even though the analyst lowered his target price from $30, as he likes Carnival’s cost-cutting.
For example, Carnival’s Q2 report said the company is cutting out 13 ships through sales and retirements. In addition, it is reducing its capex spending by $5 billion over the next 18 months and $7 billion in annual operating expenses.
That is all fine, but the company still expects to run a monthly cash burn of $650 billion. In the first six months of 2020, its operating cash flow was negative $1.8 billion. But after adding investing burn, including capex spending, of $1.256 billion, the total burn during the first half was $3.06 billion. That works out to $509 million per month. Keep in mind as well that during at least half of Q1 the company was in full operating mode.
Therefore, the burn rate is still increasing. CCL stock is not going to move higher until they can see some light at the end of the tunnel of this burn rate.
What to Do With CCL Stock
Just like with airline stocks, investment sentiment could turn around quickly on this stock if a coronavirus vaccine appears before the end of the year. At that point, they will believe that people will be more willing to travel on cruises. As a result, CCL stock’s present tumble could be halted once that event happens.
However, in the long-term, Carnival is likely going to have to raise either more equity or debt, or a combination of both. That prospect will likely weigh on CCL stock in the near-term.
Analysts polled by Yahoo! Finance estimate earnings per share of negative $5.40 for the year to November 2020, improving to negative $1.41 in 2021. Moreover, these analysts expect revenue to dramatically improve from $7.2 billion in 2020 to $12.6 billion in 2021. That is likely to imply a huge increase in cash flow as well.
If a vaccine is available throughout the world, investor sentiment will change. So CCL stock is likely to fall in the short-term, but investors can take advantage of this.
They can average cost their holdings of CCL stock down as the stock falls. They know that light at the end of the tunnel is very likely to happen.