The near-complete shutdown in the tourism sector will continue for months longer. Despite the gloomy short-term prospects, Carnival (NYSE:CCL) stock is nowhere near any risk of bankruptcy.
The company shored up its line of credit and drastically lowered costs to wait out the cruise cancellations. But if the government is not allowing ships to depart from its shorts for a few more months, then why is CCL stock trending higher?
Investors need to differentiate between Carnival as a trade on the bounce or a buy for the long-term time frame.
CCL Stock Lifted By Hope
Market traders like to speculate on Carnival stock. By betting on the U.S. curtailing novel coronavirus infections, markets will be on the sectors that benefit the most from businesses re-opening. The cruise ship tourism business would finally generate much-needed revenue from tourists.
For that to happen, the Centers for Disease Control and Prevention would need to let its “no sail” order expire. For now, though, the cruise industry voluntarily suspended voyages in the U.S. until Oct. 31.
The industry is using the no-sail period to establish enhanced health protocols. No cruise line company benefits if even one of its ships faces a Covid-19 breakout. During the pandemic, cruise ships at sea could not dock at various ports as countries locked-down borders. For example, ships could not port amid mounting fears of onboard Covid-19 outbreaks.
This fall, as the flu season begins, risks of the virus spreading again are real. So, Carnival must have a foolproof way of screening passengers before and during travel.
Strong Liquidity
To improve its debt-equity profile, Carnival registered the sale of 93.66 million shares at $14.02. It used the proceeds to repurchase $836.3 million of convertible notes. Hindsight is 20/20 as the company issues shares at low prices. Before the pandemic, the firm bought $600 million on buybacks and paid $1.39 billion in dividends. It financed this by issuing $1.4 billion in debt.
Carnival has a debt-equity ratio of 1.1x. This is still better than that of Royal Caribbean (NYSE:RCL) or Norwegian Cruise Lines (NYSE:NCLH):
Positive Catalysts
Holding Carnival shares now is risky. Revenue is absent, debt is rising and cash flow is negative. Still, market participants like to speculate. And if one or more drug companies have a working vaccine on the market, the government no longer needs to restrict ships from disembarking.
Consumers, especially those who are bored and have plenty of money to spend on travel, will be eager to travel around the world again. Having the safety of a vaccine would reverse the feelings of fear of catching the coronavirus.
Investors should have a conservative mindset on their expectations for a vaccine. During the 1918-19 Spanish influenza pandemic, scientists and physicians tried to develop a vaccine. And even though scientists were unsuccessful at the time, our current advancements of science at the RNA and DNA level give us hope.
Carnival investors will need to hang on that hope.
Risks and Your Takeaway
Surging infection rates of the coronavirus during the upcoming flu season is a risk factor for the tourism re-opening hopes. Investors unwilling to bet that Carnival may set sail again this year should avoid this stock.
Cash burn rates will force the company to raise more debt to pay the bills. By the time its business reopens, the company may have trouble managing its elevated debt.
Carnival does not have enough upside at this time to justify the speculation. Analysts rank the stock as a “hold” (according to Tipranks), which is another way to tell investors to avoid the stock.
Tracking the drop in coronavirus cases daily in the U.S. may help the cautious investor in timing a better entry point. The more contained the virus is in the U.S., the more likely the government will let Carnival open up its business.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
