Carnival Corporation (NYSE:CCL) is the largest cruise company with many challenges and risks to face this year and beyond. It could be argued that 2022 will be a year of strong recovery for the cruise industry globally. But if it is not, then what does this mean for CCL stock?
We are almost two years after the start of the novel coronavirus crisis. If asked then, most of us would have said this pandemic should be over by now. The truth is far from this optimistic scenario. The delta variant is both aggressive and very dangerous, causing the continuation of the pandemic’s negative implications.
One example of the delta variant’s severity is a report that China’s growth for 2021 was reduced to 8.3% from 8.6%. An 0.3% reduction in one of the biggest economies in the world is significant.
Meanwhile, the International Energy Agency “slashes oil demand forecast as delta variant spreads.” The report expects global demand to drop for the rest of 2021 due to the strong measures taken by several countries to fight the delta variant.
How This Affects CCL Stock
And while one could argue that lower oil prices are good news for Carnival Corporation as that should bring operations costs lower, the main factor that will be positive for the company is an increase of the persons going on a cruise. This is expected to improve and bring more revenue to Carnival as more ships are expected to resume their cruise operations by the end of 2021.
Still, the number of infections from coronavirus in the U.S, Europe, and Asia are high despite a global vaccine rollout program underway.
I am also skeptical about news such as a report that said, “A coronavirus outbreak on Carnival Cruise Line ship that sailed from Galveston, Texas, to Belize is one of the largest reported on a vessel sailing from the United States since cruises relaunched this summer.” There were 27 persons found positive. All had been vaccinated.
I also believe Carnival’s decision to accept “unvaccinated guests” unvaccinated guests as passengers is both too risky and reckless, despite extra procedures.
How could a cruise trip be safe with unvaccinated guests? Or fun if cases of coronavirus infections occur? I cannot justify this risk.
Yearly Filing Raises Concerns
The 10-K annual 2020 report is full of interesting information about the financial strength of CCL stock.
It is not just the collapse of revenue to $5.59 billion in 2020 compared to $20.8 billion in 2019, and the net operating loss and net income loss reported in 2020. It is the increase in debt to $22 billion in 2020 from $9.6 billion in 2019. This makes the balance sheet of Carnival too weak to be a reason to invest in the company.
Carnival also raised $3.24 billion in 2020 from issuing stock in addition to taking on debt. This stock dilution is bad news from a valuation perspective. Gurufocus reports that CCL stock has an Altman Z-Score of 0.31, which means the company is in the distress zone. A debt-to-equity ratio of 1.8 and a cash-to-debt ratio of only 0.29 do not look good indeed.
I expect further issuing of shares may occur to raise money and pay off a large amount of debt. And if this occurs, it would probably cause the CCL share price to tumble.
The company’s cash burn also is an issue for investors to evaluate. Carnival spent about $500 million per month for the first half of this year, according to its seconde-quarter business update.
With the $9.3 billion in cash, the company can operate for several months – 1.5 years to be exact. But, 2022 should be a year of a strong rebound for Carnival.
Prospects for a CCL Stock Rebound
In business and investing, nothing should be taken as certain. But Carnival reported a very positive development recently.
“Booking volumes for all future cruises during the second quarter of 2021 were 45% higher than booking volumes during the first quarter of 2021,” the company said.
Despite this, I believe that tough times are ahead for Carnival along with the better days. Investors should be on alert.
I cannot be too optimistic given the company’s recent financial performance. Fundamentals are too weak. And, it is unknown how long the delta variant will continue to be a threat.
For conservative investors, it is best to avoid CCL stock now.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.