The novel coronavirus pandemic has done a number on several sectors, but the cruise lines have arguably fared the worst. And although the sector’s situation has improved since March, the industry still has a long way to go before reaching pre-pandemic levels. That’s why it’s not surprising that Carnival (NYSE:CCL) stock is still down almost 65% so far in 2020.
The company is in a difficult situation. Despite the multiple steps Carnival has taken to mitigate the effects of Covid-19, it could still face bankruptcy if demand for its cruises does not return by the end of 2021. I don’t believe there is a danger of the company filing for Chapter 11. But there are too many unknowns for me to place a “strong-buy” rating on CCL stock.
CCL Stock Is a Victim of Panic-Induced Selling
It seems a bit strange that the stock is still trading below $18 per share. Based on the company’s 2019 results, Carnival has a fair value of $57.83 per share. I’m not saying that the stock should be trading at that level. But the figure does indicate that, under normal circumstances, the shares worth much more than their current valuation.
I also believe that the cruise lines have positive attributes that the markets have not reacted to. Although a majority of their revenue come from the U.S., a substantial amount of their sales come from other regions. Europe, Australia, and Asia are all opening up more quickly than the U.S. due to better containment policies in those places.
As a result, I expect the cruise companies to start generating revenue before the end of the year. So, the scenario of zero revenue in the fourth quarter that many investors may be fearing is unlikely to materialize for Carnival at this stage.
Meanwhile, in the U.S., the Trump administration has initiated Operation Warp Speed, a public-private partnership aimed at launching a Covid-19 vaccine as soon as possible. With Moderna (NASDAQ:MRNA), Johnson & Johnson (NYSE:JNJ), and AstraZeneca (NYSE:AZN) in the mix, the U.S. government is hopeful that the company can come up with 300 million doses of a safe, effective vaccine by January 2021.
If a vaccine gets delivered by the start of the new year, Carnival could start generating revenue by the summer, which is a best-case scenario at this point. Since Carnival relies on the U.S. for 55% of its revenue. any positive news regarding the Covid-19 vaccine will be a net positive for the firm.
Ready for a Zero-Revenue Scenario Through 2021
Considering the capital-raising activities of Carnival over the last six months, I don’t think there is any danger of the company running out of cash.
Carnival raised $1.86 billion and €800 million through first-priority senior secured term loans. In a separate capital-raising activity, the company announced the pricing of $900 million second-priority senior secured notes due 2027. The firm’s total long-term debt, including capital-lease obligations, stands at $16.162 billion, and it owes $13 billion by the end of 2023.
Meanwhile, Carnival’s cash and cash-equivalent balance stood at $7.9 billion as of July 31. The company says its cash-burn rate stands at $650 million per month,. Once demand returns, its cash-burn rate should start to go down. But then again, that’s unlikely to happen within the near future, so Carnival has its work cut out for it.
The Stock Is Trading at Historic Lows
The valuation of CCL stock remains very attractive because, I believe, markets are focusing too much on its negatives at this stage. There is a lot of uncertainty for the cruise lines in the short-term, and that’s why their shares continue to trade at historic lows. But Carnival remains a good pick with a decent risk-reward ratio.
The name certainly looks even more attractive, considering the valuations at which some tech stocks are trading. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ: AMZN), and Facebook (NASDAQ:FB) are all still trading near their historic highs. Although these are sure bets, investors should not load up their portfolio with those stocks, given their valuations.
As I’ve pointed out, investors seem to be pessimistic about Carnival. The company has already announced that it has experienced a substantial uptick in international bookings for 2021.
Other cruise operators have reported a similar spike in demand, and that’s not surprising. People are cooped up in their homes and are aching to travel once again. After many consumers’ income took a hit, cruise lines offer an affordable option for travelers.
The Bottom Line
Carnival’s situation is not as difficult as some believe. Uncertainty is looming large over the sector, so Carnival’s shares have been punished.
Investors who have a reasonable risk tolerance can buy many shares of the company, as long as they hold onto them for a long time. CCL stock will inevitably fluctuate with each piece of news, but there is a limited risk of the company going belly-up.However, considering the negative issues I highlighted, I cannot place a “strong buy” rating on the stock.
The response to Covid-19 is different in each country. However, one thing is certain; Governments want to get rid of this crisis as soon as possible to get their economies going again. Nevertheless, the company has enough liquidity to survive until then. If you want to pick up a stock that is trading at a discount, then maybe Carnival is for you.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
