On Feb. 24, Carnival (NYSE:CCL) sold 40.45 million shares of CCL stock for $25.10 per share. The equity sale raised $1 billion of much-needed capital for the cruise operator. Unfortunately, those who bought the shares made precisely 1.9% on their investment over the 71 days that ended on May 6. That compares to a 6.2% gain for the S&P 500 during the same period.
Cruise stocks continue to face significant volatility. After climbing about 140% since it hit its 52-week low of $11 in October, CCL stock may not have any gas left in the tank.
Is it time to abandon Carnival’s ship? I’ll have a look at the pros and cons of selling the shares.
CCL Stock Once Traded Over $70
When you think about it, is 1.9% a bad return over 71 days? On an annualized basis, it’ works out to about 10%. The average annual return of the S&P 500 from 1957 through 2018 was 8%. So, from that perspective, a 1.9% return over 71 days is really not so bad.
However, the fact that investors can eliminate a ton of company- and industry-specific risks by buying the S&P 500 suggests that the risk-adjusted returns of CCL stock over the 71 days are much worse than that of the index.
When I last wrote about Carnival in early March, I wondered whether CCL stock could get back to its all-time high of $72.70. I concluded that Americans’ desire to get out and travel would intensify as more people in the country become fully vaccinated.
Well, as of May 4, 105 million Americans were fully vaccinated, while 150 million had received at least one shot. According to U.S. Census data, there are 209.1 million Americans 18 or older, so about 50% of adult Americans have been fully vaccinated.
While that’s good, I suspect that cruise reservations won’t start to accelerate until the percentage is much closer to 100%. I realize we won’t actually get there because all kinds of people believe they know better than scientists. But if three-quarters of the adult population gets vaccinated, I believe the various cruise lines’ phones and websites would catch fire from all the future reservations.
On May 3, AARP, formerly the American Association of Retired Persons, reported that the Centers for Disease Control and Prevention (CDC) had indicated that it wanted to get U.S.-based cruise ships back in business by midsummer. That would be well ahead of its previous target of November 2021.
Under the CDC’s new rules, fully vaccinated passengers will only have to take a rapid antigen test when embarking on cruises. Those who are not fully vaccinated can still go on cruises, but they must get polymerase-chain-reaction (PCR) coronavirus tests in advance.
Royal Caribbean (NYSE:RCL) CEO Richard Fain said that its ships that recently sailed out of foreign ports had just ten Covid-19 cases out of 100,000 travelers. If that doesn’t tell you something about the future of cruising, nothing will.
As I said in March, I do think CCL stock can reach $50 by the end of 2021. Fain’s comments made me more confident about that belief.
Volatility Is Still High
U.S. Treasury Secretary Janet Yellen spooked the markets on May 4 when she stated that interest rates might have to rise to make sure the economy doesn’t overheat. Carnival’s stock fell on the news.
The Motley Fool’s Rich Smith tied Yellen’s comments about interest rates to the unbelievable amount of debt that each of the three major publicly traded cruise operators have amassed over the past 15 months.
“From the end of 2019 through the most recent quarter, Carnival Corporation’s long-term debt load has nearly tripled in size, to $26.5 billion,” Smith wrote in his May 4 article.
“Smaller Royal Caribbean’s debt load is up 150% at $20.7 billion, and even Norwegian Cruise Line has needed to double up on debt, which now stands at $11.7 billion.”
Consider Carnival’s best-case scenario.
In fiscal 2016, Carnival had an operating margin of 18.7% based on $16.4 billion of revenue and $3.1 billion of operating income. In 2016, it had free cash flow of $2.1 billion [$5.1 billion cash provided by operating activities less $3.1 billion of capital expenditures]. That’s as high as Carnival’s free cash flow (FCF) has been in recent years.
Even if it issues no new debt, gets its FCF up to 2016 levels, and uses all of that FCF to pay down debt, it would take close to 13 years to pay down its debt entirely. Under the same conditions, it would need a little over seven years to return to its 2019 debt level of around $11.5 billion.
First, Carnival has to get to get its FCF up to $2.1 billion. That could take 12-24 months. Then it’s got to hope that interest rates haven’t increased by much during that time.
That’s a tall order.
The Bottom Line
I’ve always liked the cruise industry, despite the fact that its business model requires massive amounts of capital. However, that requirement keeps a lot of would-be competitors out of the game.
From where I sit, now is not the time to abandon the Carnival ship. In fact, if you were one of the investors who bought CCL stock at $25.10 in February, I would have some cash ready in case volatility send its shares into the low $20s in the months ahead.
Over the long-term, I think the shares could test their all-time high by the end of 2022. Stay the course.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.