Carnival Corp. (NYSE:CCL) is likely planning on resuming cruises next month assuming the CDC allows this. If that happens the company’s cash burn should improve greatly. This could be a huge catalyst for CCL stock despite potential ongoing losses.
CCL stock has been under severe stress all year, down 70% year-to-date and 63% in the past year. In the past month alone, the stock is down 17%. This is indicative of a company that is losing a good deal of money.
New Cruises From Lifted No-Sail Order
On Sept. 30 the White House overruled the Centers for Disease Control (CDC) from extending its no-sail order beyond Oct. 31. In effect, the government sided with the cruise industry that is chafing under the existing restrictions. It looks like they are going to try to start cruising after this.
CNBC reported that the industry has been “fine-tuning” an industry public health proposal from infectious disease experts and former health officials. Potentially this could help the cruise industry to get the order lifted starting on Nov. 1.
If that happens, then Carnival could lower its huge cash burn.
Cash Burn and Liquidity Update
Recently Carnival gave an update on this burn rate. In a prospectus dated Sept. 15, filed with the SEC, Carnival said that monthly cash burn was going to be $530 million in the fourth quarter. This is down from $770 million in the third quarter.
So, in effect, the company will only be burning $1.59 billion in the fourth quarter. This includes its monthly operating expenses and capital expenditures but does not include debt maturities. The problem is Carnival has $1 billion in debt maturities due in Q4, according to page S-6 of the prospectus. Over the next year, up until Q4 2021, it has $2.4 billion due.
Here is how they are going to handle this. The prospectus indicated that Carnival is looking to raise up to $1 billion in new equity. In addition, Carnival said its liquidity is $8.2 billion as of the end of Q3.
Assuming its quarterly burn rate is $1.6 billion, or $6.4 billion over the next year, plus $2.4 billion in debt due, it has enough to get through this storm. This will cost $8.8 billion, but if it raises $1 billion in equity, it will have $9 billion in liquidity.
But it is going to be tight, as you can see. No one likes to run a business this way.
Therefore, if its cruises out of the U.S. can resume in November or anytime during the first quarter of 2021, the company’s cash burn will improve greatly. That will take the pressure off its tight financial situation.
For example, Carnival said it lost $1.699 billion in Q3 and had $2.4 billion in customer deposit liabilities. If Carnival has to fund any portion greater than a sixth of its customer deposits, it will need to raise more debt or sell some assets.
What To Do With CCL Stock
Recently Barclays turned bullish on the industry, according to Seeking Alpha, and said that the “worst part is in the past for the industry.”
There have been 23 analysts covering CCL stock in the past year, according to Marketbeat.com. Their average price target for the stock is $20.13 per share, up almost $5 from its current price. That works out to a potential price gain of 32.7%, or one-third higher than today.
The problem is there really is no good way to value the stock right now. Here is one method.
In my previous article on Carnival last month, I wrote 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 10x earnings that would put the value for CCL stock at $104 per share. That represents a gain of 567% from today. So, you see that when the turnaround happens it could be quite dramatic.
On the other hand, let’s assume that it takes three years for CCL stock to reach this price. This is still a great return. For example, on a compounded annual basis that represents an annual return of 88% per year.
Most of that return would likely occur at the beginning of the period. Nevertheless, even if only half of that return happens, this is still a great ROI for most investors.
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.
