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Carnival Corporation Stock May Be Turning Around, But Value Investors Should Stay Away

Carnival Corporation (NYSE:CCL) stock took a massive beating due to the unprecedented global pandemic.

Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

Since then, though, it has proven to be relatively resilient.

Investors consider it to be a turn-around play as cruises resume. However, even if there is a serious step-up in recovery, CCL stock continues to be a remarkably risky play at this time.

The novel coronavirus ravaged the cruise industry in 2020, and most companies in the sector are still reeling from its effects. Carnival, along with other cruise liners, somehow avoided bankruptcy.

Nevertheless, the crisis has messed up their financials significantly by weighing down its top and bottom lines. Carnival has racked up an enormous debt load and issued a substantial number of shares to stay afloat over the past year. Despite its beaten-down metrics, it trades at over 12 times forward sales.

Hence, investors should avoid such a risky proposition.

A Closer Look at CCL Stock

Carnival had been forced to postpone the resumption of its activities on multiple occasions in the past year. However, it appears that the Covid 19 protocols and vaccines are starting to turn the tide for the company and its stock.

In its most recent quarter, Carnival generated over $540 million in sales. Though these results pale compared to what it used to make pre-pandemic, it’s a positive start that Carnival can build on for the next few quarters.

Naturally, CCL stock had cratered along with other cruise line stocks during the height of the pandemic. However, its stock had underperformed the market well before the pandemic played spoilsport. The comapny’s 5-year returns are at a negative 52% compared to the S&P 500 returns of over 123%.

In the past 12 months, though, the stock has been picking up the pace again. Investors believe it to be a turn-around play with the stock recovering most of its losses from last year.

However, I feel that the investor intrigue surrounding CCL stock is unjustified. There are multiple risks regarding its external environment and its worrying financial state, which investors seem to have ignored.

Future Outlook

Carnival faces multiple headwinds as it looks to recover in 2022 and beyond. Perhaps its biggest concern at this time is the servicing of its incredible debt load. At the end of August this year, it had a colossal debt balance of $31.2 billion.

However, its third-quarter results have shown some encouraging signs. Its revenue for the quarter came in at $546 million, which is a marked improvement from the same period last year. Its interest expenses totaled over $418 million, offsetting most of its revenue, though.

It closed out the quarter with $7 billion in cash, which is imperative in servicing its debt and returning to full capacity. Moreover, it has reduced its interest payments significantly to $67 million. Moreover, it has negotiated payment terms for $4 billion worth of debt.

Furthermore, occupancy numbers rose by 20% from June to August. On top of that, advanced bookings for next year are also trending over 2019 figures. Nonetheless, the question remains whether these developments are enough for the company to overcome its balance sheet troubles and reward its stockholders.

Final Word on Carnival Stock

Carnival hopes to rebound in 2022 and return to winning ways. However, it has a tall order ahead of it in servicing its whopping debt load.

Moreover, major uncertainties are surrounding the external environment pertaining to the global pandemic and its economic repercussions. Additionally, there is a possibility that the pent-up demand for cruise travel doesn’t materialize.

Therefore, it’s best to avoid CCL stock at this point.

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/2021/11/ccl-stocks-risk-reward-is-skewed-against-equity-investors/.

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