Debt Hangover Will Continue to Negatively Affect Carnival Stock

The pandemic triggered downside for Carnival (NYSE:CCL) stock has been painful. In terms of stock price action, there have been multiple attempts to break-out on the upside. On a one-year basis, the stock still trades lower by 26%.

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

Source: Flickr

I further believe that CCL stock is unlikely to witness any strong bounce-back anytime soon. There will be potential trading opportunities. However, the stock still looks unattractive from a medium to long-term investment perspective.

Let’s first talk about the positives before looking at the headwinds.

The Good News for CCL Stock

Recently, Carnival reported business updates for Q1 2022. The company ended the quarter with a total liquidity buffer of $7.2 billion. This is likely to ensure that Carnival navigates the crisis period.

Another important point to note is the improvement in utilization and the bookings. As of February 2022, the company reported total customer deposits of $3.7 billion. Fleet-wide occupancy for March 2022 was robust at 70%.

It’s also worth noting that the company believes that EBITDA (earnings before interest, taxation, depreciation and amortization) will turn positive at the beginning of the summer season. This seems entirely likely with revenue per passenger cruise day for Q1 2022 already higher by 7.5% as compared to 2019 (pre-pandemic levels).

Clearly, even with the headwinds of the pandemic and geo-political tensions, the outlook has significantly improved for Carnival. This improvement does not reflect in the stock price, however. For year-to-date 2022, CCL stock is lower by 9%.

It’s therefore important to discuss the headwinds that are dominating the stock sentiment. In my view, these factors will continue to impact CCL stock in the next 12 to 24 months.

The Debt and Cost Burden

Carnival Corporation survived one of the worst periods for cruise companies. However, the survival has come at a big cost. The company’s balance sheet concerns will sustain in the coming years. That’s one of the biggest headwinds for CCL stock.

To put things into perspective, Carnival reported total debt of $33.2 billion in Q4 2021. In the most recent quarter (Q1 2022), the total debt has swelled to $34.9 billion.

High leverage also implies significant debt servicing cost. For Q1 2022, the company reported interest expense of $368 million. On an annualized basis, the interest cost is likely to be around $1.4 to $1.6 billion.

Of course, there will be gradual recovery in terms of operating cash flows as utilization improves. However, the deleveraging process is likely to be long. It’s worth adding here that Carnival has a capital expenditure forecast of $6.0 billion for 2022 and $4.2 billion for 2023. This would imply further debt on the balance sheet.

In terms of margins, the recent surge in fuel price is likely to have a negative impact. To some extent, this will offset the positive impact of increased capacity utilization.

With high vaccination rate in the developed world, Covid-19 concerns have declined on a relative basis. However, there is a renewed rise in Covid-19 cases globally and the World Health Organization believes that it’s the “tip of the iceberg.” If there is a big surge in cases, cruising activity is likely to be impacted. It’s therefore too early to write-off the Covid-19 headwind.

CCL Stock Cash Flow

Prior to the pandemic, Carnival reported operating cash flow of $5.5 billion in 2019. While OCF has turned negative in the last two years, the pre-pandemic numbers are an indication of the cash flow potential.

The concern is that the company’s cash flows in the next few years will be utilized to repay and service debt. Equity holders are unlikely to be beneficiaries of any renewed growth in cash flows.

I mentioned earlier about the company’s capital expenditure pipeline. In order to prevent further leveraging, equity dilution might be an option to raise funds. This will further have a negative impact on CCL stock.

With these factors in consideration, I believe that CCL stock is good for trading opportunities from overbought or oversold levels. However, there are better investment themes from a long-term perspective.

On the date of publication, Faisal Humayun did not hold (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 Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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