Carnival (NYSE:CCL) stock should get through the pandemic, but with a balance sheet looking like a “long Covid” survivor.
Long Covid can last for months or years. Studies have found up to 203 symptoms in 10 organ systems. Some people never recover.
The same is true for the Carnival balance sheet, which in May showed long-term debt of over $27 billion. This is a company that, even before the Covid-19 pandemic, did less than $21 billion in business for fiscal 2019.
The uncertain prognosis has made Carnival a volatile stock. It traded over $31 in June, and below $20 on July 19. Now it’s right at $21, with a market cap of $25.4 billion.
Uncertain Opening
Given its financial troubles, Carnival is desperate to cruise again. But politics is keeping that from being smooth or certain.
The Delta variant of Covid-19, which is both more virulent and more serious, is leading to contradictory government orders. Florida had successfully challenged federal Covid restrictions in a trial court, Recently an appeals court overturned that ruling.
The company re-launched most of its lines in July with CEO Arnold Donald insisting there’s a lot more demand than supply. Carnival says about half the fleet should be operating by the end of November but capacity will remain limited.
Carnival has nine brands. Recent ship transactions show it is focusing heavily on the Carnival brand, transferring two ships to it from its European AIDA and Costa lines.
The Debt
Between June of 2020 and this past May, Carnival booked $141 million in revenue. When fully operational it can book over $5 billion per quarter. It is due to report its August quarter on Sept. 27, with $770 million of revenue expected.
Donald cut the quarterly drain from $4.3 billion in the May 2020 quarter to just $2 billion in the most recent quarter. The company ended May with $7.2 billion of cash on the books, so CCL stock can survive another year of losses.
Carnival’s bonds were deemed “junk” a year ago, and could be downgraded further. A February issue of $3.5 billion in six-year debt carried a yield of 5.75%. At the height of the pandemic Carnival sold bonds at 11.5%. These were recently selling at $1.13.
CCL stock needs careful management of cash flow and debt levels for the company to keep operating. It has that. Free cash flow was a negative $1.74 billion in the May quarter. It had been about $3.3 billion for each of the previous two quarters.
Carnival has also begun selling new debt with longer terms to pay back higher-priced debt taken out at the height of the pandemic. The latest move will retire half of that 11.5% debt with new notes carrying a coupon rate of 4% and a 7-year term.
The Bottom Line on CCL Stock
Before the pandemic Carnival was using debt to buy new ships and paying dividends of $2/year.
Those days aren’t coming back any time soon. CCL stock is worth half what they were five years ago.
CCL stock is now a speculative trade rather than an investment. You’re betting on low interest rates and the economic reopening. You can play that either way. About 21% of Carnival’s stock was being held short recently. This may be why the snapback from recent lows was so sharp.
Analysts are divided on what to do next. At Tipranks, four are saying you should buy it, and three are saying you should sell it. I think it’s a trade, the kind of stock you buy and watch closely.
Better times are coming, but hope is the way to profit on Carnival right now.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future, now available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
