Last week, Carnival (NYSE:CCL) staged a mini-rally by rising from $15.00 to around $17.50. That ended quickly when the Centers for Disease Control and Prevention extended its no-sale order for cruise ships. The delay will hurt CCL stock and potentially put more selling pressure in the near-term.
Investors who have big losses invested in the travel service will have to wait longer before its business recovers. It could take at least two or three years.
Carnival traded as high as $25, just half the price from its $51.94 52-week high, in early June. At the time, the company expressed optimism that it could resume cruises in August, but the CDC said the no-sail order will extend through the end of September.
A Closer Look at CCL Stock
This will put increasing pressure on Carnival’s cash flow. It needs to continue paying minimal staff to take care of docked ships in the interim. The company may accept bookings and take deposits but cannot earn any revenue until the government allows ships to depart.
The alarming increase in COVID-19 infections across the US increases the risk of the government imposing stricter measures. Though only the hardest-hit States face new rules, the country suffers because it restricts inter-State travel.
This in turn hurts the air travel industry and the cruise ship business. Travelers cannot take the plane to get to the ship. So, the country and the world will likely have a canceled-event, masked world for the rest of the year.
In the most optimistic scenario where masks are required and cruise ships may resume travel, demand may fall. Few, especially the elderly, will want to spend time on an expensive cruise wearing a mask the whole time.
With the summer mid-way through and the fall season approaching, the new flu season is upon us. Another round of hysteria about the next coronavirus wave or the flu strain will hurt cruise ship demand even more.
CCL Stock Price Target
Wall Street analysts are neutral on CCL stock. 12 out of 20 analysts rate the stock as a “hold.” The average price target is $16.12.
This neutral view implies that investors should either avoid the stock or wait for positive catalysts to emerge first.From a historical point of view, Carnival’s sales growth lagged the industry and the S&P 500 index:
| Carnival | Industry | S&P 500 | |
| Growth Score | 38 | 50 | 77 |
| Sales Growth | |||
| Sales Growth Next Year | 74.90% | 70.60% | 11.40% |
| Sales 1‑Year Chg (%) | -14.90% | -4.60% | 17.30% |
| Sales 3‑Year Avg (%) | 0.10% | 3.80% | 13.20% |
With the pandemic still unfolding worldwide, revenue will only fall. Investors are also guessing when businesses might re-open. Initial demand at that time will lag historical levels.
If the pandemic ends, Carnival will have to spend more on advertising to encourage customers to return. It might also have to offer steep discounts to win back wary travelers.
Positive Catalysts
A vaccine from Moderna (NASDAQ:MRNA) or AstraZeneca (NYSE:AZN) as early as later this year will put an end to the down-cycle in the travel industry. Carnival investors will need to keep a close eye on vaccine developments and the chances of a product coming to market soon.
The CDC’s permission for letting Carnival ships to depart from the U.S. is another positive catalyst ahead. The company may get some revenue back to slow the cash burn rates.
Still, it will need to sell shares and issue debt to bridge the losses in the near-term. Lenders will gladly help Carnival stay afloat at high interest rates. This will prevent the company from declaring bankruptcy and will ultimately save investors from losing everything.
Value investors should avoid Carnival for now. Wait another year before re-evaluating its rebound potential.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
