Carnival Corp (NYSE:CCL) is likely to turn around next year and CCL stock is now starting to reflect this. In the past month alone it is up almost 57% as of Nov. 27.
In fact, since Nov. 20, the stock rose more than 24%. The market is now highly optimistic about the possibility of a serious turnaround in Carnival’s operations next year.
As I pointed out in my last article earlier this month, this optimism is partly based on the new ruling from the Centers for Disease Control. The CDC listed the conditions where it will allow cruises to operate in a detailed PDF document on Oct. 1.
In other words, they have to jump through some hoops, paperwork, red tape, and more importantly, training.
Capital Raise and Financial Updates
But more than that, the market took note that Carnival raised additional capital. First, it raised equity to repurchase about $500 million of costly convertible notes. Now there will only be $536 million of the convertible notes outstanding. This is positive news for shareholders since it prevents a good deal of dilution once CCL stock starts to rise again.
The company also sold $1.945 billion in new U.S. dollar and Euro-denominated notes. This can be used to help the company pay its operating costs until it turns cash flow positive again.
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.
This means that its burn rate would be $1.59 billion for the fourth-quarter ending Nov. 30. Therefore, this recent capital raise replenishes those funds. I estimate Carnival had $8.5 billion in cash at the end of November.
This is another reason why CCL stock has been rallying. The idea is that the company will have enough liquidity until is able to produce significant cash flow.
Prior to this, the market was worried. It was not clear Carnival could raise more equity. The higher stock prices this past month more or less put those worries to bed.
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 run rate of $10.40 per share. That is its earnings power.
So, at a mere 10x earnings, this earnings power means CCL stock is worth $104 per share. That represents a massive gain of 4.8 times the stock’s price of $21.58 as of Nov. 27. So, you see that when the turnaround happens it could be quite dramatic.
However, not everyone sees things this way.
TipRanks.com reports that eight analysts have an average target price of just $15.67 on Carnival stock. That represents a drop of over 28% from today’s price.
Moreover, Marketbeat.com has a slightly higher average target from 21 Wall Street analysts. Their consensus price is $16.99, or over 21% below the price on Nov. 27. In addition, Yahoo Finance says that 13 analysts have a similar price target of $17 per share.
I am not worried about what sell-side analysts say about a fast-moving cyclical recovery play like CCL stock. They are usually loath to change their price targets and typically lag the rebound in such stocks as they occur.
Moreover, as Carnival was able to recently raise additional capital, this puts a real floor on CCL stock going forward.
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.
