Carnival Will Recover Before 2021 Now That Cruises Are Allowed

Carnival Corp. (NYSE:CCL) stock will recover now that the Centers for Disease Control and Prevention (CDC) has agreed to conditionally allow cruises to operate.

Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

Carnival is likely to ramp up ahead of its first U.S. Caribbean cruises. That could happen once it applies for or gets a conditional sailing certificate.

So far this year Carnival stock is still down over 68% over the past year and 73% year-to-date. In fact, the stock has not moved since the CDC announced the resumption of cruises under certain conditions.

Following the CDC’s Conditions

The CDC listed those conditions for cruise lines in a detailed PDF document on Oct. 1. As a result, most cruise lines, including the Cruise Lines International Association have “thrown in the towel” as the Associated Press reports, for 2020 in terms of U.S. cruises.

The industry needs the month of December and possibly part of January to get ready to apply for the sailing certificates it needs to operate from U.S. cities. For example, one condition is that a cruise line has to conduct “simulated” voyages with volunteer passengers. It has to show that everything went according to plans that the CDC wants.

For one, ship owners must test all passengers and crew at the start and end of all voyages, which are limited to seven days, according to AP.

In addition, they have to demonstrate they have procedures for testing, quarantining, and isolating passengers and crew. This means they must build test labs on all ships. They have to have arrangements to isolate or quarantine passengers onshore if needed.

The next requirement is that the simulated voyages have to show how they would handle sick passengers using volunteers who act sick, but, of course, are not.

In other words, they have to jump through some hoops, paperwork, red tape, and more importantly, training.

The CDC was likely not willing to do this. They were likely forced to come up with these conditions by the White House under President Donald Trump’s leadership, according to previous reports.

What This Means for Carnival

At least one analyst thinks that most cruise lines will not begin operating until late January or early February. Apparently, that is what the CDC was targeting as well.

Here is how that will affect Carnival’s finances. On Oct. 8, the company announced its Q3 earnings (or rather losses). First and foremost it said it now had $8.2 billion in liquidity as of the end of August, its fiscal Q3 end.

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. Over the next year, up until Q4 2021, it has $2.6 billion due.

The company’s prospectus indicates that Carnival is looking to raise up to $1 billion in new equity. In addition, I believe the company will begin to produce cash flow during Q1 and should be fully free cash flow (FCF) positive by the end of Q2 or shortly thereafter.

That will allow it to produce enough cash flow, in addition to its liquidity, to both fund losses in Q1 and meet its obligations.

But, obviously, the market is worried. The sooner the company starts making cash flow the quicker it can get on a pathway to FCF profitability.

What To Do With CCL Stock

The market likes to discount the future. That means that once it suspects that profits will return it will discount forward to the present those profits.

In a previous article on Carnival, 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 658% from today. So, you see that when the turnaround happens it could be quite dramatic.

TipRanks has a target price of just $14.80 on Carnival stock from eight analysts who have written about the stock in the last three months. That represents a gain of just 8% from today’s price.

Moreover, Marketbeat has a slightly higher average target from 21 Wall Street analysts. Their consensus price is $16.99, or 21.9% above today’s price. Yahoo! Finance says that 13 analysts have a similar price target of $16.38.

So there is much to be gained by buying CCL stock both in the short term and in the long term.

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.

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