The increasingly worrisome coronavirus cases and mortality in the United States is a headwind for the tourism industry. Cruise ship companies are especially susceptible to bankruptcy risks the longer departures are on hold. Not all hope is lost for Carnival (NYSE:CCL). A multi-billion stock sale will lift Carnival’s cash on hand. Normally, existing shareholders get hurt the most from the dilution. But the market does not see it that way.
Between Nov. 10 and Nov. 13, the stock fell from $19 to $15 only to bounce back. What is preventing Carnival stock from falling?
Speculators Bet on Carnival Stock
Carnival marked a $7.80 low reached the height of panic selling in April. The stock generally trended higher since. Those who bought the stock at the bottom are not afraid to add to the speculative positions. The cruise line continues to take bookings. And its loyal customers are itching to resume their multiple cruise itinerary annually sometime in late 2021 or 2022.
Carnival will gladly accept refundable customer bookings. It has to. It cannot set sail until the Centers for Disease Control lifts its ban. The CDC posted that the order will remain in effect until the earliest of:
- The expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency,
- The CDC Director rescinds or modifies the order based on specific public health or other considerations, or
- November 1, 2021.
Pfizer’s (NYSE:PFE) application for an Emergency Use Authorization for a Covid-19 vaccine would shorten the CDC’s cruise ship ban timeline. So, that would send CCL shares back to at least the $30 level next. Before the pandemic, Carnival’s stock traded at over $40.00, so the $30 target is reasonable.
On Nov. 18, Carnival announced additional cancellations for the first part of 2021. This includes all embarkations from U.S. homeports in Jan. 2021. It also includes embarkations through Feb. 28 at Baltimore, Charleston, Jacksonville, Long Beach, Mobile, New Orleans, and San Diego. Fundamentally, the stock will not have much upside between now and Jan. 31, 2021.
Carnival filed a stock sale worth $1.5 billion on Nov. 10. It took advantage of the post-election rebound that saw shares rise from $14.00 to over $19.00 on Nov. 9. The cash will delay risks of bankruptcy but not long. Assuming delays in approving the vaccine, a slow initial rollout, and an unwillingness to take it, the pandemic may continue well into 2021.
Carnival will keep burning more cash at that time. It has operating costs and a mountain of debt to pay off. Further stock dilution ahead will punish existing shareholders.
In hindsight, speculators who sold the stock in the $19-$20 range earlier this month probably got out in time. The stock could either rally or fall from here. And because the vaccine news creates noise that moves it, investors cannot predict where it will head to, next.
Fair Value and Your Takeaway
Investors may guess on wild revenue declines in 2021 followed by a surge after that.
Based on the metrics below in a five-year discounted cash flow growth exit model, CCL stock is worth $17.35:
|Discount Rate||10.0% – 9.0%||9.50%|
|Perpetuity Growth Rate||3.5% – 4.5%||4.00%|
|Fair Value||$11.32 – $26.04||$17.35|
Investing in Carnival and expecting a profit has odds of no more than 50/50. It depends on the vaccine rollout happening within the next three months. This is a tight time timeline and may prove too optimistic. As the company waits, it continues to lose money every quarter. Bankruptcy is a looming threat and time is Carnival’s enemy. After the stock’s recent spike, investors should keep the profits and avoid the stock unless it dips sharply again.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.