Carnival Corp (NYSE:CCL) is on the rise again. I have been optimistic about CCL stock since my Aug. 4 article saw some light at the end of the tunnel. The stock is now up 24% in the past month as it is getting clear that a novel coronavirus vaccine is not too far off in the near future.
If that occurs, the U.S. Center for Disease Control (CDC) could end up lifting its “no sail” order for cruise companies.
Moreover, this past week the news that a cheap and quick, no-lab-required Covid-19 test would be available from Abbott Laboratories (NYSE:ABT) has also lifted cruise stocks.
CCL Stock Stuck as Cruise Delays Extended
The CDC’s no sail order lasts through Sept. 30, but there is a good likelihood they will extend it again. That order was issued on July 16. Later on July 21, the CDC said it would not modify the order until it reads all public comments submitted up until Sept. 21.
Here is what is going on in the industry. First, several cruise lines, including Princess Cruises, which is owned by Carnival Corp. have extended their “pause” of operations through Dec. 12. In addition, Carnival has extended the pause of all departures from Australia through Dec. 12. I suspect Carnival will do the same with its U.S. departures as Sept. 30 approaches.
The real question is when the company will begin operations after that. I suspect it will not be until mid-January or February 2021.
The question then becomes, does the company have enough liquidity to last until then?
Liquidity May Be Just Enough
Some experts believe that the company is not going to make it, particularly as Carnival is burning through $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 18 months without further financing. This included plans to remove nine ships within 90 days through asset sales.
I am still a little bit skeptical though if the “pauses” extend well into Q1 2021. I suspect at that point the company will look to raise more capital. Hopefully, this would not be dilutive to CCL stock shareholders.
Where This Leaves Investors
If you buy CCL stock or already own it, you already know that this is a speculative play at best. That means there could be another downside dip in the stock if a vaccine does not appear soon, or more bad Covid-19 news prevails.
However, some believe that history has a good lesson here on a cruise stocks rebound, as MarketWatch’s Tomi Kilgore highlighted on Monday. People have short memories. In 2019 a number of cruise industry mishaps occurred. But cruising remained popular overall and the cruise industry rebounded.
Moreover, Kilgore cited more evidence cruise line clients remain loyal and understanding.
The bottom line is this: expect a rocky road, but it looks like CCL stock may have already hit a bottom. That will be the case if the company no longer needs to increase its liquidity by raising equity.
Moreover, keep in mind that when profits return it, could be quite dramatic. For example, for the quarter ending August 2019, Carnival made $2.60 per share. That works out to an annualized rate of $10.40 per share.
So at a mere 10 times earnings that would put CCL stock at more than $100 per share. Let’s say it takes two years for that to occur. Compared to Monday’s $16.48 close, that represents a more than five-fold gain. Over two years that compounds out to about 150% per share for two years. That still represents an excellent return on investment.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. Mark Hake runs the Total Yield Value Guide, which you can review here.
