Carnival (NYSE:CCL) stock has fallen over 44% since its recent high in early June. CCL stock has been in a slump recently. However, I think Carnival will be able to survive in the long run. It’s going to be difficult for a while. But in the end, the company — and CCL stock — should survive just fine.
Why? Because at some point, probably early next year, a vaccine for the novel coronavirus will be widely available. For example, Dr. Anthony Fauci, the nation’s leading infectious disease expert, told Congress on July 31 that he believes a vaccine will be ready then. He said that over 250,000 Americans have volunteered to take part in clinical trials.
As a result, once a vaccine is available, the Centers for Disease Control and Prevention will likely be willing to lift the no-sail order on U.S. cruise operators. On July 16, the CDC extended that order to Sept. 30, 2020. The U.S. has the option of extending that order even further.
Therefore, for all practical purposes, the no-sail order will likely not be lifted until there is a vaccine widely available in the U.S. And that will not likely happen until next year.
Can Carnival Survive Until Then?
Some experts believe that the company is not going to make it. One analyst on Seeking Alpha points out that Carnival is burning $650 million per month, makes no revenue and has over $20 billion in debt.
On July 10, Carnival stated it had raised over $10 billion in additional liquidity. This was much higher than the $7.6 billion in liquidity the company said it had on May 31.
Therefore, combined with its existing cash, the company can operate for at least a year and a half without further financing. This included plans to remove nine ships within 90 days through asset sales.
Carnival has already said it was extending its sailing pause through Dec. 15 in some regions, including Asia, South America, California, Hawaii and Mexico.
But on July 29, the company provided an update. It is also going to remove a further two ships. These ships were deemed write-downs. The company said these removals would not involve any further cash expenditures.
Analysts expect revenues in the year ending November 2020 to fall 71% to $6.3 billion. Revenue last year was $20.8 billion. However, analysts polled by Yahoo! Finance expect a rebound next to $11.95 billion. I suspect that will provide enough cash flow for the company to stabilize operations. In addition, if the vaccine comes in as expected, it is possible that people will return to cruise travel much more enthusiastically than expected.
What Should You Do With CCL Stock?
At this point, analysts are not projecting profits for the company for at least two years. One way to look at this is to look for entry points in the stock when hope seems to evaporate.
That usually comes within a week or two after a disappointing set of losses or poor financials from the company. That happened several weeks ago with CCL stock.
Therefore, if you are up to being a contrarian, now is probably a good time to look at taking a position in this stock. Keep in mind that you will likely have to average cost into the stock.
Why should you do this? The rebound in earnings could be dramatic. Keep in mind that that for the quarter ending August 2019, Carnival made $2.60 per share. That works out to an annualized rate of $10.40 per share. That is a great testimony to its earnings power.
The Bottom Line: Carnival’s Earnings Power
Now that earnings power is lower, given its higher debt and interest charges. But even at half that rate, or $5.20 per share in earnings, the stock trades for less than three times earnings. That’s using its July 31 closing price of $13.88.
Therefore, I suspect within one year from now you could easily see the stock return to a more normal price-earnings ratio of 10 times to 15 times. That would put its expected price at $52 to $67.60. That represents a gain of 3.75 to 4.87 times the original investment.
Even if it took two years for that to be realized, the average annual return on investment would be 94% to 120% per year. For investors who average cost into CCL stock, that could be a very worthwhile return.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
