Even at its recent January “peak” of $51.50, Carnival was trading well below its 2018 high around $70. Once the lockdowns started, you could get a share of CCL for less than $10. Even after a year of trading that saw speculators triple their money, the stock opened April 9 at $29.
At that price Carnival sports a market cap of $34 billion, less than twice its pre-pandemic revenue of $20.8 billion. During 2019 Carnival also earned nearly $3 billion, $4.32 per share.
The question isn’t why the stock is doing so poorly today. It’s “why isn’t it doing better?”
The Growth Hunger
Carnival isn’t one cruise line, but several. While best known for its giant ships bearing the corporate name, it also owns Princess Cruises, Costa Cruises, Holland America and Cunard, among others.
Under its late founder Ted Arison, who was born in Palestine and emigrated to the U.S. in the 1960s, Carnival created the modern cruise industry. Arison actually co-founded Norwegian Cruise Line Holdings (NYSE:NCLH) in 1966, then split to launch Carnival in 1972. Taking Carnival public in 1988 gave Arison the capital needed to buy out competitors.
Arison’s son Micky, perhaps best known as owner of the Miami Heat, completed the acquisition of Princess Cruises in 2003 and grew a fleet of over 100 ships. But that growth ended up hurting the stock.
Before the pandemic Carnival was expecting delivery of up to 22 new ships by 2025. It was putting all its cash flow to work. Capital spending topped out in 2019 at $5.4 billion. The company had just $46 million in free cash flow that year, with the money going to pay out loans and maintain a $0.50/share quarterly dividend costing nearly $1.4 billion/year to service.
The Pandemic Strikes
The losses from having its boats docked caused enormous financial damage to both Carnival and Arison. While the company is based in Miami, its ships fly “flags of convenience” to avoid taxes and regulation. This made it ineligible for the huge bailouts other companies got in 2020.
But the Federal Reserve did throw so much cash into the economy that Arison was able to raise the money needed to keep Carnival alive. This included a $4 billion loan at 11.5% and a $1.75 billion loan convertible into stock.
The pandemic also hit Arison’s personal finances. He sold $102 million in Carnival stock at the end of November, right after the company converted some of the $1.75 billion loan into shares.
It’s these loans that loom over the stock now. Carnival still had $9.5 billion in cash at the end of 2020, after losses of over $10 billion through December. But the big note is due in 2023 and that’s not far away. The company is next expected to report earnings April 17 for the quarter ended in February 2021, with expected losses of $1.51/share. Compare that with a November quarter loss of $2.41/share and you can see why some are optimistic about CCL.
The Bottom Line
Carnival’s current market cap must be compared with the $50 billion of “machinery and equipment” (its boats) on the books. The company is presently selling for less than its break-up value.
When times were good at Carnival, it brought 15% of revenue to the net income line and generated nearly $5.5 billion in operating cash flow each year. The Centers for Disease Control now says cruising could resume off the U.S. in the summer.
That may be too late to save Carnival stockholders, which is why its threat to move is serious. You can still speculate on its success.
If you’ve been speculating in it over the last year, you’re a winner. But for now, new investors should steer clear.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in stocks mentioned in this story.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/