The gains certainly are welcome. Even with the bounce, CCL stock and CUK stock remain the two worst large-cap (over $10 billion) stocks so far in 2020. They’ve declined 69% and 72%, respectively; Occidental Petroleum (NYSE:OXY) is next, losing ‘just’ 63% of its value this year.
But the gains also are a bit curious. Carnival itself really hasn’t delivered much in the way of news over the past week or so. Rather, investors seem to be betting on stocks like Carnival, perhaps hoping for a return to normalcy.
Those hopes have some validity. Work continues apace on a vaccine, with Moderna (NASDAQ:MRNA) coming to a supply agreement with the federal government on Tuesday. And at some point, life will return to normal.
But that alone is not enough to make the case for CCL stock. At the least, it’s not enough to choose CCL over other plays that similarly could benefit from optimism toward normalcy and its eventual arrival.
Not Just Carnival
Again, it’s not just Carnival that has rallied of late.
Airline stocks have gained. The U.S. Global Jets ETF (NYSEARCA:JETS) has risen for eight straight sessions, gaining 14% in the process. Major U.S. airlines like Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL) have rallied even faster.
It’s difficult to pinpoint exactly why the sector lately has popped. Lower prices certainly helped; most of these other stocks also touched a multi-month low last week. The end of a blowout earnings season for tech, and huge rallies in the market’s biggest names, may have led some investors to rotate out of growth names and into value plays.
Or it could hope for and/or optimism toward better times for the industry. Whatever the cause, CCL stock is not alone.
Two Big Problems for CCL Stock
I’m broadly sympathetic to the investment case for the kinds of stocks that have rallied over the past few sessions. Normalcy will return, one way or another. Near-term losses are material, but there should be pent-up demand for travel that might lead to a few blowout quarters down the line.
And with such steep sell-offs, a return to past highs suggests enormous upside. Carnival, for instance, would rally about 200%. That process could take a decade, and Carnival still would be a fantastic investment.
But for CCL in particular, that case falls somewhat flat. The company has raised billions of dollars in debt this year that has to be paid off out of future earnings. Guidance for 2020 in fact suggests that Carnival will burn over $7 billion in cash in 2020 alone, a material portion of a current $11 billion market capitalization.
The burn doesn’t stop when the calendar turns, either. Wall Street sees the company losing more than $2 per share next year; even accounting for likely reduced capital expenditures, Carnival could burn another $1 billion next year. From that point on, interest expense will be significantly elevated for years to come.
The other problem is that the pandemic hits Carnival’s business model in a way that simply isn’t true for airlines, in particular. How many potential customers have been turned off from the industry for good owing to stories of cruisers being stuck on ships for weeks at a time? How many are going to buy or rent recreational vehicles instead, or risk two airline flights that last a few hours instead of a cruise that lasts at least several days?
What Normalcy Means
Put another way, normalcy for all of us doesn’t mean normalcy for Carnival. Demand is going to be lower for years, and possibly for good. (That’s doubly true given that millennials, at least for now, don’t seem terribly interested in the industry, perhaps in part due to its environmental impact.)
And given costs that are going to clear $10 billion between losses, dilution, and interest expense, a return to normalcy doesn’t mean that CCL stock goes back above $50.
In contrast, some travel names have a clearer path toward restoring past profits. Admittedly, those stocks haven’t fallen as far as CCL. But that’s not because Carnival stock is a better opportunity.
It’s because Carnival has bigger problems than even some of the companies most impacted by the pandemic. And that suggests that this short-term rally in CCL stock is likely to run into renewed long-term skepticism.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.