Be Patient — Carnival’s Pandemic Recovery Will Take Some Time

As a long-time fundamental equity analyst who is very much at home reading and studying corporate financial statements, I was literally shaking while reviewing Carnival Corporation’s (NYSE:CCL) income statement in its most recent 2020 10-K filing.

Carnival cruise (CCL) ship on the water
Source: Ruth Peterkin / Shutterstock.com

For a company with a $32 billion market capitalization and a 40-year history to report a 73% drop in revenues is a sight not many analysts will see in their careers. CCL stock wasn’t the only company devastated by the Covid-19 pandemic shutdowns, but cruise ships and airlines seem to have garnered the most attention, particularly in investment circles.

Most pandemic recovery companies aren’t that difficult to analyze. If they don’t go bankrupt, they will recover at some point absent any devastating recession. That means their stocks will reclaim former highs as well. The question is, of course, when — and how long — it will take. And are you a long-term investor or a short-term trader?

Carnival and the Covid-19 Pandemic

Carnival Corporation is the world’s largest cruise operator with about 45% global market share. It operates under well-known brands such as Princess, Holland America, Cunard and its own eponymous brand. Moreover, CCL currently operates 87 ships based all around the world.

In 2020, CCL announced plans to sell or scrap 19 ships to raise money and to create a more efficient and effective fleet that will create more revenues with less bookings. This is expected to help margins and increase returns on capital going forward. These ships represented 13% of normal operating capacity but only 3% of operating income.

CCL originally had five new ships that were to be delivered in 2021, and currently the plans are to take delivery for only one. There are 12 remaining ships on order to be put into service in the coming years. There are no cancellation clauses on these new ship builds, but the ability to delay delivery is available in most of these contracts.

Recovery Time Frame

According to CCL CEO Arnold Donald, the cruise industry is not likely to return to pre-pandemic levels until at least 2023. This makes sense, as lockdowns still exist around the world, and many countries have had trouble controlling the Covid-19 spread. The problem is not so much bookings or demand, which appear to be strong, but that each country has their own pandemic regulations. CCL cruises reach dozens of countries around the world.

Citibank recently launched coverage on CCL with a somewhat positive outlook on the company’s future:

“We expect strong pent-up demand to be supportive to vacation booking trends. With vaccine roll out under way, mandatory testing regimes being put in place, and on board health care  facilities we think the cruise lines are well placed to capitalize on this demand.”

In many ways, cruise ships may be a safer alternative than flying to a country where Covid-19 safeguards may not be up to global standards or vaccines have not reached a large portion of the population.

What Is CCL Stock Worth

CCL raised $16.2 billion debt and $3.2 billion in equity in 2020, leaving them $9.5 billion in cash at year end after burning through approximately $10 billion throughout the year. I expect a $6 billion burn rate in 2021 and perhaps $2.5 billion in 2022, before turning cash-flow positive again in 2023. So it’s possible — not guaranteed, but possible — that they can make it until 2023 without raising capital. However, CCL will remain a very levered company and not achieve investment-grade ratings until 2024 or beyond.

If CCL can achieve 80% of peak revenues (2019) in 2022, 90% of peak revenues in 2023  and return to peak levels in 2024, CCL stock appears to be undervalued. Yield improvements from removing inefficient ships and the 12 new ships that are expected to be delivered over the next three years could improve operating margins over historical levels by 2023.

Using that scenario in a discounted cash-flow calculation, CCL stock may be worth in the range of $30-$35 in the near term. For the long term, it’s possible that over the next five years, CCL can reclaim its all-time high around $71, barring any major global economic recession. That scenario produces very strong double-digit annualized returns over the next five years.

An additional catalyst will be the reinstatement of the dividend. CCL has paid steady dividends going back decades, with dividend yields often in the 2%-4% range. CCL suspended its dividend in the second quarter of 2020 due to the expected negatives effects of the Covid-19 pandemic. I expect a resumption of the dividend in 2023 as free cash flow turns positive.

What to Do With CCL Stock

I can’t vouch for whether CCL stock is a good trade at this point or where the price will be in the next week or month. However, it appears to be a solid long-term investment as it reclaims its previous highs over the next three to five years while the travel industry strongly recovers.

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

Tom Kerr, CFA is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.


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