How Carnival Plans to Survive the Second Wave

Carnival Corp. (NYSE:CCL) will not set sail for the rest of the year. Its most important line of ships won’t be in action until at least February. But on the plus side, at least this year, which has been horrible for CCL stock and its peers, is almost over.

At this point, cruise operators have three main concerns: How can we make sure we have enough capital to survive the crisis? Can we raise more cash, and how can we best prepare for the eventual opening up of the economy? Carnival can control two of those issues, but it can’t speed up the vaccine-dissemination process.

Carnival’s management is taking care of raising money and preparing for the reopening. In its September business update, the world’s largest cruise operator reported that its monthly average cash burn rate for its third quarter was $770 million, largely in-line with expectations. Looking ahead, the company expects its monthly average cash-burn rate in Q4 to be approximately $530 million.

The declining cash-burn rate should help stem the losses of Carnival and CCL stock. Meanwhile, there have been some new developments on the novel-coronavirus front.

Specifically, the UK has become the first country to roll out the vaccine made by Pfizer (NYSE:PFE) and BioNTech SE – ADR (NASDAQ:BNTX). And if the FDA  authorizes Pfizer’s vaccine very soon, the shots could be deployed as early as next week.

In short, things are looking up. However, as I have said previously, it will take a lot of time for the shares of cruise operators  to return to their pre-pandemic levels. But for those want to bet on this sector, CCL stock is the best option.

Fighting an Uphill Battle

I have to commend Carnival for the position that it’s in. Covid-19 is an unprecedented event, and although the virus has affected almost every major enterprise globally, travel businesses like cruise lines have suffered the most.

So it may sound surprising that CCL stock has jumped nearly 50% over the last month . There are several reasons for the rally. First, the cruise operator has raised a lot of cash to ensure that it can survive the pandemic.

On Nov. 13, Carnival completed the sale of 94.5 million of its shares under its $1.5 billion “at-the-market” equity-offering program. The share sale came less than two weeks after Carnival completed its previous $1 billion stock offering.

Carnival also completed a direct offering of 49.2 million shares on Nov. 19. Proceeds raised from the offering will be used to repurchase about $500 million of costly convertible notes. Shareholders should take heart from this development. It’s rare for any company to go ahead and extinguish convertible debt in the current environment.

The dilution has put pressure on CCL stock, but the company needs to sell more shares to meet its day-to-day expenses.

Meanwhile, although Carnival’s revenue was just $31 million at the end of Q3, its cash balance of $8.176 billion, as of the end of August , was impressive.

A Consistent Performer

The reason why many other InvestorPlace authors and I are fans of Carnival is its consistent performance. I don’t believe any company was prepared for the pandemic.

That’s why you have to consider the pandemic with a grain of  salty when analyzing companies’ performances. It’s a nonrecurring item. In other words, it’s an entry that appears on a company’s financial statements but is unlikely to happen again.

And  taking that into account, Carnival doesn’t look too bad. In the last 12 quarters, the company beat analysts’ average earnings estimates nine times.

Naturally, during the pandemic, the company’s sales have tumbled. But analysts, on average, expect its sales to jump 45% next year.

Before we move to the final section, let’s talk a bit about the valuation of CCL stock. Its shares are trading at a price-sales ratio of 1.62 times, the cheapest in its peer group and below the S&P 500, which trades at 2.72 times its sales.

The Bottom Line on CCL Stock

Cruise companies are trying to convince regulators and consumers that cruises are safe. However, they face an uphill battle. Quick dissemination of the vaccine is their best bet to get their businesses moving again.

However, it seems we are on the right track now. Carnival has done well to survive  2020. No one denies that it’s facing financial headwinds, but we have to give credit where it’s due.

Management has sold equity, debt, and assets to shore up its cash reserves. However, CCL stock remains significantly more than 50% below  its 52-week high.

Although investors may be squeamish considering the nature of Carnival’s business and the potential danger that the coronavirus posed to passengers and crew, I believe investors should buy CCL stock.

Cruises are an inexpensive form of entertainment. Once this crisis is over, there will be a lot of pent-up demand for them.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan is a contributing author for InvestorPlace.com and numerous other financial sites. A former data journalist at S&P Global Market Intelligence, he’s passionate about helping retail investors make more informed decisions regarding their portfolio.


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