When Carnival Corporation (NYSE:CCL) posted another disastrous quarter of losses, sane investors would run for the hills. Instead of dropping, CCL stock held its ground after posting third-quarter results.
Why do investors continue buying Carnival shares? Why should they think the stock is poised to soar?
Loss Did Not Hurt CCL Stock
In the third quarter, Carnival posted losses of $2.8 billion. Still, it ended the quarter with a healthy $7.8 billion in liquidity. This is enough for Carnival to return to full cruise operations. The absence of bankruptcy risks is a good reason to bet on CCL stock climbing steadily from here.
In the quarter, the average cash burn rate for the third quarter was $510 million. This number included ship operating expenses, restart costs, interest expenses and capital costs. It excluded scheduled debt maturities and the providing of cash collateral.
Carnival completed the cumulative debt principal payment extensions of around $4 billion in the quarter. Since it will not need to worry about liquidity as its business restarts gradually, investors should have no concerns, either.
President and Chief Executive Officer Arnold Donald highlighted strong net promoter scores, the enthusiasm of its guests and crew, and the success of its restart efforts. For example, Carnival restarted more shifts out of the U.S. than any other cruise brand. Demand is so strong that customers are committing to early bookings at attractive prices for 2023. Based on that success, Carnival started to announce the launch of 2024 sailings even earlier than usual.
The company posted a $630 million increase in guest deposits. Bookings beyond a year are three-fold above historical levels. Carnival expects debt deposits will continue growing. Advertising expenses are dramatically lower. This enables the firm to focus on lower-cost channels. In addition, direct marketing to its 40 million-guest database does not cost much. Word-of-mouth will lower advertising expenses and drive margins higher.
The Covid-19 delta variant is a risk. Health regulators may demand greater restrictions for the cruise line industry, hurting revenue.
Rising capital expenditures are a risk that would weigh on the balance sheet. Chief Financial Officer David Bernstein said that 19 ships left the fleet. This will save on fuel costs by removing inefficient ships. Conversely, the 10% capacity increase will add to capital expenditure requirements in future quarters. So, investors should brace for ongoing earnings losses in the quarters ahead.
Carnival will offset the rising costs for shipbuilding by restarting more ships. As people increase bookings, management will have a better forecast on demand.
Readers may use a five-year discounted cash flow revenue exit model, which uses a revenue exit multiple to calculate the terminal value after five years.
|Discount rate||8% – 6%||7%|
|Terminal revenue multiple||2x – 3.8x||3.5x|
|Fair value||$17.27 – $28.49||$25.65|
Model courtesy of finbox
In the above model, a generous 3.5x revenue multiple implies a fair value of almost $26 for Carnival stock.
Readers may argue that the stock does not deserve high multiples at this time. The chart above would support that view. CCL shares score poorly on all key metrics of growth, value, and quality. Until health regulators like the Centers for Disease Control and Prevention (CDC) permit the company to increase ship voyages, Carnival will post quarterly losses.
2022 Is an Inflection Point
Carnival has strong momentum for all brands in the latter half of 2022. By then, its fleet utilization will increase dramatically. In spring 2022, Carnival plans to return to its full fleet for guest operations.
For now, occupancy across all its brands is good. By design, Carnival is currently not yet at 100%. This is due to protocols around maximizing the health, safety, and well-being of staff and passengers.
Carnival is doing its best to adjust pricing to match booking patterns. The customer concerns for the Delta variant may hurt bookings. So far, the company is meeting its occupancy level targets through the first half of 2022. As infection rates drop worldwide, Carnival will report better revenue. It will get closer to break-even as occupancy targets reach 100% early next year.
Carnival is already reporting growing deposit rates. Customers cannot wait to take a vacation cruise next year and beyond. Investors who buy the stock now are betting that the cruise ship business will fully recover in the next year. CCL stock is a low-risk bet because restrictions are easing.
On the date of publication, Chris Lau 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.