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Reality Is Setting in for Overvalued and Debt-Ridden Carnival Corporation

Cruise line stocks have been rallying of late on the prospect of the reopening of ports of call and destinations for the vaccinated. Shares of battered and bruised cruise ship operator Carnival Corporation (NYSE:CCL) have generated a healthy 21.7% gain in the first half of the year. That is an absurd gain, considering its ships are still absent paying customers and its liquidity position continues to worsen. Yet CCL stock trades at 21.6 times cash flow.

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

While CCL stock has been rallying among other discretionary stocks, reality has started setting in now, and most of the gains have now been wiped away. In the past month, the share price lost 16.8%.  The stock is still gross overvalued, as it trades at over 27 times its forward enterprise value to sales. It’s clear that meaningful recovery is way off for the industry, which leaves cruise liners with a tall order in managing their structural issues.

With its ships stuck in ports, CCL continues to burn a massive amount of cash each month. That averaged $500 million per month and won’t stop until cruises restart. Before the pandemic kicked in, the company had $10 billion in debt, which nearly triple. With $11 billion in liquidity from financing and early bookings, it should have enough to stave off bankruptcy concerns. However, without a meaningful increase in capacity, things will continue to get worse for the company.

As it continues to wait around to relaunch its cruises, it will continue to put a massive strain on its finances. Its interest expenses have seen a 10-fold increase from the first quarter of 2020. Moreover, a mistimed launch could lead to further cash burn. Payroll is an important expense that needs a strong season to scale effectively. Additionally, docking ships at multiple ports increases overall costs rather than docking at an MRO port for a year. Fuel costs are another element and are subject to change based on commodity trends. Covid-19 health and safety protocols are likely to be complicated and extensive and require more expenses to be incurred by the cruise liners.

Challenges Ahead for CCL Stock

With the summer already here, it’s evident that 2021 will be a so-so year for CCL stock. Winters are usually forgettable for the company; hence, all eyes will be on 2022. Re-booking trends are looking good so far for 2022, which could be the year it could mount a recovery. Till then, its financial situation will continue to worsen, and the management of its finances will be critical in staying afloat.

However, there is a lot of inconsistency in dealing with travel at this time. Logistical challenges within various jurisdictions might be unresolvable at this time.  Hence, cruise liners will lose a lot of their market share to local tourism, which will make a more sizeable part of leisure activities.

Booking volumes are increasing, which is a great sign for the company. Volumes in the second quarter for future cruises were roughly 45% higher than the first quarter. In the company’s second quarter 2021 business update on June 24, company CEO Arnold Donald commented that: “With the aggressive actions we have already taken to optimize our portfolio and reduce capacity, we believe we are well-positioned to capitalize on pent up demand and to emerge a leaner, more efficient company, reinforcing our global industry-leading position.”

Bottom Line On CCL Stock

Wishful thinking investors have bid up CCL and other cruise line stocks. The reality is now setting in that it will take a long time before the sector shows meaningful signs of recovery. Until then, CCL will have to deal with its massive debt burden and find ways to limit its cash burn. Otherwise, the financial strain will continue eating up its reserves and push it into a corner. Hence, it’s best to avoid CCL stock at current levels.

An alternative could be either of two recently launched travel-related exchange-traded funds. the SonicShares Airlines, Hotels, Cruise Lines ETF (NYSEARCA:TRYP) debuted on May 20Two weeks later, on June 4, the Defiance Hotel, Airline, and Cruise ETF (NYSEARCA:CRUZ) launched. CRUZ has CCL stock at a a weighting of 6.66% of the ETF’s total assets. And, while it’s only the ETF’s third-largest holding, it’s 156 basis points higher than TRYP.

On the date of publication, Muslim Farooque 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.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

Article printed from InvestorPlace Media, https://investorplace.com/2021/07/reality-is-setting-in-for-overvalued-and-debt-ridden-ccl-stock/.

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