Carnival Cruise (NYSE:CCL) continues to ride the wide and volatile waves of the stock market. CCL stock was gaining some nice momentum earlier in the year on hopes of the cruise industry getting back on its feet… or should we say, back in the water.
While that has been the case, the stock has not reacted the way that investors were hoping. Shares are down 23% from the June high, while CCL stock suffered a peak-to-trough decline of almost 40%.
After hitting a new 2021 high, the stock fell in 21 out of the next 28 sessions, until bottoming on July 19. Although Carnival is trying to recover now, it still has plenty of obstacles.
Covid-19 Remains a CCL Stock Risk (Or Does It?)
A common-sense approach to investing in Carnival would be to look at the situation with the novel coronavirus. Not many businesses suffered a full decline in revenue, but Carnival did and CCL investors along with it.
The company logged three consecutive quarters with a 99% decline in sales and has now logged five straight quarters with a revenue decline of 85% or more. That’s an incredible washout in sales and it’s a wonder the business can even survive.
On the surface, Covid-19 should be a major risk to Carnival — it should be a major risk to all travel- and entertainment-related businesses. However, the country has proven there are plenty of people that don’t seem to care about the risks. We’re not going to get political here, it’s just a simple observation. The vaccines have received immense push back, as did the lockdowns imposed throughout 2020.
Regardless of public opinion though, Carnival faces a risk from Covid-19 simply because it could be hit with another no-sail order. So could its peers Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH). Without ships in the water, these companies can’t make money, plain and simple.
Additionally, a resurgence in coronavirus cases is going to keep many travelers at home, vaccinated or not. So this remains a major risk to the bull case.
To Thrive, Carnival Must First Survive
When a company suffers five consecutive quarters with an 85% drop in sales, something needs to be done for its financials. A cash flow blow like that isn’t overcome easily.
For Carnival, the company has sold additional stock to raise funds and has taken on debt. At the end of its fiscal 2019 year — so pre-Covid — Carnival had $11.5 billion in debt. That debt has roughly tripled to $32.2 billion in the most recent quarter.
In that sense, Carnival has survived so far, but it’s far from thriving at the moment. Even in the most recent quarter, the company lost about $2 billion. On the plus side, the trends are moving in the right direction. For instance:
42 ships from eight of the company’s nine brands either have resumed or are announced to resume guest cruise operations by November 30, 2021, which is over 50% of the company’s capacity, with more announcements expected in the coming weeks.
Booking volumes for all future cruises during the second quarter of 2021 were 45% higher than booking volumes during the first quarter of 2021. Cumulative advanced bookings for full year 2022 are ahead of a very strong 2019, despite minimal advertising or marketing.
Further, analysts’ expectations are moving in the right direction, too. Estimates call for a notable loss this year and for revenue to fall about 45% vs. 2020 — the latter of which is a bit shocking. However, 2022 is much better. Estimates call for a swing to a profit of 28 cents a share and for revenue growth of almost 500% to $18.25 billion.
With more than $9 billion in cash and short-term investments, Carnival could be okay. But it needs to see a stronger resumption in business for its stock to react in kind.
Trading CCL Stock
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So what are talking about in regards to 25% up or down from current levels? Those numbers are not pulled out of a magic hat, nor were they randomly generated. Instead, those measures represent key levels on the chart.
Amid the brutal decline from early June to mid-July, shares broke below the 200-day moving average. So far, that measure continues to act as resistance. Now ramming into the 200-day, declining 50-day and 10-week moving averages, as well as the 38.2% retracement, CCL stock is near a make-or-break spot.
If it breaks lower, the stock risks losing short-term uptrend support, as well as the 10-day and 21-day moving averages. Below that and the July low is in play, followed by the 23.6% retracement near $18. That was a major level earlier this year and should CCL stock decline that far, it will fall about 25% from current levels.
On the flip side, a break over $25 puts it above all of the major levels it’s running into now. That opens the door to the 50% retracement near $30. Previously, CCL stock found resistance between $30 and $31.50. Should the stock rally that far, it will represent a 25% gain.
From here? Keep an eye on the 200-day moving average. A close above is good. Below this measure and investors may consider remaining cautious.
On the date of publication, Bret Kenwell 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.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
