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CDC’s Blunt Warning Should Raise Final Sell Flags on Carnival Stock


Cruise operator stocks have recovered well in the past month despite the CDC’s blunt warning to ocean travelers. Shares of cruise line giant Carnival Corporation (NYSE:CCL)  are up 5.47% into January, despite the pandemic’s crushing headwinds. However, with omicron on the rise, CCL stockholders may not be in for a calm journey, particularly considering that the company’s debt load may cripple long-term expansion.

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

Cruise operators were forced to significantly increase their debt loads to shore up their balance sheets. In efforts to reduce the cash burn, Carnival has more than tripled its debt and doubled its outstanding share count. However, the macro-economic challenges continue to play spoilsport in its path to recovery.

Hence, after careful deliberation, Carnival and other cruise liners are running out of time to make a comeback in the sector.

No Vax Pass

Last month, the CDC issued a warning to cruise customers to avoid cruise travel, regardless of vaccination status. According to the health agency, the number of cases onboard cruise ships has increased considerably since omicron. Moreover, evidence suggests that the virus spreads easily between passengers in close quarters, like those onboard ships. Additionally, fully vaccinated travelers aren’t safe from getting the virus either.

The CDC had issued a “no-sail” order during the height of the pandemic but later relaxed restrictions in October 2021 with a conditional order. That order required cruise liners to sail with at least 95% of customers vaccinated. Moreover, the order was set to expire in November last year, but the CDC decided to extend the order, with some tweaking, through Jan. 15, 2022.

The CDC’s concerns are well taken, considering the number of outbreaks that have occurred on cruise ships of late. For instance, at least 17 people tested positive for coronavirus on a cruise operated by Norwegian Cruise Lines (NYSE:NCLH). Royal Caribbean (NYSE:RCL) last month discovered that roughly 48 people onboard on of its ships that docked to Miami tested positive.

Nevertheless, the CDC will have to relax its guidelines moving forward, but the concerns will remain for the foreseeable future. It will be interesting to see how the older demographic reacts to the entire mess.

Bleak Outlook

Carnival’s management had plans to return to full capacity by June 2022. Booking levels for the second half of the year were staggering and exceeded 2019 levels. Hence, Carnival is expected to generate pre-pandemic level sales as early as 2023. However, that seems like a long shot with omicron in play.

Meanwhile, with its ships docked for the better part of the last couple of years, Carnival’s debt load continues to grow at an unhealthy pace. It is burning close to a whopping $2 billion each quarter. As per its latest quarterly report, it carried an insane level of debt, totaling $32.6 billion. That is even after there had been a colossal increase in debt levels before the pandemic.

For instance, the company’s financial leverage in 2018 was at 1.73, which has now jumped to 3.6 as per its latest quarter. Moreover, its debt to equity ratio has risen by over 256% from 2018. Hence, Carnival will have it rough in achieving pre-pandemic flexibility.

Bottomline on CCL Stock

CCL stock and other cruise line shares have had a deplorable run in the past couple of years. Most investors would’ve hoped for a turnaround by now, but with new variants of the coronavirus popping up, it’s tough to be optimistic.

Carnival’s massive debt load remains a major concern and should limit its ability to expand for the foreseeable future, making these shares among those to avoid for now.

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/2022/01/desert-the-sinking-ship-that-is-ccl-stock-2/.

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