The business of the cruise operators has been facing several challenges since the onset of the Covid-19 pandemic in 2020. As a result, Carnival Corp (NYSE:CCL) stock has been volatile with a downward bias.
The cruise industry was crawling back to normalcy as the impact of the Covid-19 pandemic started to dissipate. However, geopolitical tensions have escalated in the recent past, which brings fresh concerns for the industry.
Specific to Carnival Corp, the company does not have major operations across the Black Sea. However, Carnival does have operations in the European region, including Russia. At the end of November 2021, nearly 23% of the company’s operations were in the European region.
So far, cruise trips are avoiding halts at Russian ports in the summer. It goes without saying that revenue will be impacted as the region faces high geopolitical challenges in addition to increased fuel charges. CCL stock has reacted to the headwinds and currently trades below $20.
A Contrarian View Toward CCL Stock
On a positive note, Glenn Fogel, the CEO of Booking Holdings (NASDAQ:BKNG) does not expect a major impact on summer travel plans due to the conflict. In a recent interview, the CEO opined that there is a huge pent-up demand to travel.
In unison with this message, in the Q1 2022 earnings update, CCL management noted that booking volumes have continued to build, especially since mid-January 2022 although at a slower pace due to Omicron variant. Bookings are expected to gain momentum at historical range in 2023.
In fact, cumulative advanced bookings are expected at the higher end of historical range for 2023. Carnival’s enhanced Covid-19 related protocols have resulted in lower incidence rates, making its cruises one of the safest choices for vacationers.
As of March 2022, occupancy rate of 70% was better than 58% in Q4 2021 and 54% recorded in the Q3 2021. This rate should further improve as traveling rebounds. After all, the impact of the omicron variant of Covid-19 is easing and a higher number of people are planning to travel for summer holidays.
The company is currently operating at 75% of its capacity and plans to be fully operational by June 2022. As it expands its operational capacity, Carnival will be able to accept higher booking, which in turn should enhance customer deposits and improvise operating profits.
Management estimates monthly adjusted EBITDA should turn positive by the beginning of the summer season as 100% of its fleet return to service with better occupancy rates.
Total customer deposits increased for the fourth consecutive quarter by $187 million to $3.7 billion in Q1 2022. Higher customer deposits should also help in reducing debt levels as cash flows increase in the coming quarters.
One of the negatives that has been affecting the cruise operators has been a heavy debt burden. Carnival had total debt of $34.9 billion at the end of Q1 2022, representing approximately 75% of total capitalization.
As the booking will increase, it shall improve the debt-to-capitalization ratio. The current liquidity of $7.2 billion will help the company meet its monthly cash burn of $510 million. As such, I do not expect Carnival to face challenges related to short-term obligations or refinancing.
Bottom Line on Carnival Corp
CCL stock has been trending lower due to the health risk posed by the omicron variant and geopolitical risks. Additionally, crude oil prices are above $100 per barrel and are expected to increase further between 8-11% according to industry analysts. This will likely increase the operating cost for the company in the coming quarters.
As such, management expects to post an operating loss for the full year of 2022.
However, if there is no further escalation in geopolitical tensions, CCL stock will be attractive in the range of $15 to $20. Investors should remain cautiously optimistic. I am of the opinion that the market nervousness is an opportunity to gradually accumulate shares of Carnival Corp.
On the date of publication, Sakshi Agarwalla 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.