An investment in Carnival (NYSE:CCL) has resembled the shoreline lately. Tides roll in and out, but the water level never changes too much. Since June, Carnival’s shares have bobbed around between $15 and $20 without generating undue excitement. Anyone looking for the stock to go back up to $50 where it was previously — or to $0 as the bears predict — has been disappointed.
But as things have settled down, it’s starting to create a real opportunity for longer-term investors in CCL stock. After periods of consolidation like this, the fast money tends to move elsewhere. The people that stick around create a more loyal shareholder base, and then when good fundamental news emerges, the stock can really start to move.
This phase might not be quite finished for Carnival yet, but we’re starting to see some blue skies over the horizon. That’s even despite an earnings report Thursday that left some observers unsatisfied. Here is why things are a little better than you may realize for Carnival going forward.
Q3 Earnings: Don’t Panic
Of course, the headlines from Thursday’s earnings report were dour. The company’s revenues dropped 99.5% this quarter, after all. It’s hard to sugarcoat that. Ask yourself though, did we actually learn anything new? Obviously, cruises weren’t going to pick back up significantly until 2021, so it’s not like the collapse in revenue or earnings loss were unexpected.
The company didn’t give much in the way of earnings guidance either. However, there was one key number. The company’s monthly cash burn will be down to $530 million this quarter, off sharply from the $800 million or so earlier this summer.
With operations starting up again in Germany and Italy and Carnival reporting a strong 2021 booking trend, its cash burn is rapidly coming under control. As the company raised $12 billion earlier this year, it can easily afford a few more such months as it is having now while the recovery takes root.
Carnival Stock Has Lost Some Value, But Remains Viable
Many of the travel firms have sunk too far underwater this year to ever have a realistic chance of recovering. Several of the airlines, for example, will likely have to go through bankruptcy organization to right-size their debts. And Carnival’s weaker peers, such as Norwegian Cruise Lines (NYSE:NCLH) could face the same fate.
Carnival, by contrast, still has a seaworthy balance sheet. The company managed to raise $12 billion in liquidity earlier this year. It was a painful level of dilution, but it ensured the company’s survival. How quickly can Carnival make back that $12 billion?
Prior to Covid-19, Carnival was producing roughly $3 billion per year in earnings before interest and taxes (EBIT). This figure is important as it gives you the effective firepower available to deal with the company’s debt. Going forward, Carnival will have very little tax liability, as it can offset future profits against this year’s gargantuan losses.
On interest, currently Carnival faces a massive burden. However, as the cruise industry recovers, Carnival should be able to refinance and repackage many of its loans, securing far more attractive terms. Thus, within a few years of annual profits in the $2-$3 billion range, it can quickly attack the losses that it piled up this year.
Carnival Cruise’s Bottom Line
It’s not going to be an easy recovery for Carnival. In fact, the prognosis for the cruise industry has taken a significant turn for the worse recently. All the new quarantines and lockdowns in Europe have scared off a meaningful chunk of the potential customer pool while reminding folks more broadly of how contagious Covid-19 is. Against that backdrop, it’s increasingly clear that even if cruises are operating normally, it will take many moons for passengers to return at normal levels.
The good news offsetting this, however, is that Carnival is in a much better position than its rivals. Carnival secured the much-needed cash early on in this crisis and now has the golden survival ticket. While its peer could easily end up in bankruptcy, Carnival should have the liquidity to carry on unless things get remarkably worse.
In the short-term, Carnival will remain extremely bumpy. One week, it will be up on vaccine news. The next, it will drop on a fresh Covid-19 outbreak or pass earnings. It’s not going to be a pleasant relaxing trip over the next few months. But if you’re up to ride some waves, there’s a decent chance that Carnival will sail you toward some meaningful trading profits once the virus is finally behind us.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
