Carnival Corp. (NYSE:CCL) has once again run into rough seas. The cruise ship operator capsized in 2020, with the stock losing most of its value as Covid-19 spread around the globe. However, CCL stock enjoyed a surprisingly robust recovery from the initial jolt, as shares moved up from a low of $8 to as high as $30.
Nowadays, Carnival stock is trading around the $17 per share mark, which is well off its highs, but still far above the Covid-19 lows. Unfortunately for shareholders, it seems the next move is likely to be further in the downward direction. There are still lingering effects from the pandemic, and now the inflationary wave and surging energy prices threaten to slam Carnival with another blow. Meanwhile, the balance sheet remains in less than sterling condition.
Getting Back Toward Normal, But Issues Remain
It’s been a slower road back for the cruise ship industry than many other travel names. After all, something like airlines is fairly essential. If people need to travel to a faraway location for either business or a life event such as a wedding, it’s generally going to happen with an airline. Regardless of ongoing pandemic fears or new variants, that sort of trip comes back sooner or later.
Cruises, by contrast, are less essential. There are plenty of ways to get recreation and diversion. Many of them don’t involve being cooped up in tight quarters for a week. Sales have boomed in areas such as RVs and camping equipment, hiking gear, home and gardening tools and so on as people have taken up pastimes that are lower-risk as far as the virus goes.
Eventually, cruise demand will probably regain pre-Covid levels. Perhaps this could happen as early as the end of 2023. However, some portion of the cruising population is unlikely to go again, either due to virus concerns, vaccine mandates, or whatnot.
In addition — and I don’t see this point discussed enough — cruise lines will earn structurally lower profits for quite awhile due to two main factors. One, there are a ton of incentives out there. Many people that delayed cruises in 2020 and 2021 are taking to the seas again, but often with huge pricing incentives or upgraded stays to reward them for not cancelling their cruise altogether.
Meanwhile, on the cost side, the spiraling price of oil slams the cruise lines’ profitability. It takes a ton of energy to power those massive vessels through the ocean and provide services to all the guests. On top of that, other costs such as labor and food are soaring. So, cruise lines will be spending more to accommodate guests while earnings lower revenues per passenger due to incentives. That’s not a good mix as far as profit margins go.
Stock Price Is Down But That Doesn’t Equal Cheap
Despite the optically lower share price, given the higher number of outstanding shares plus the increase in debt, the market is now assigning a higher overall worth to Carnival than you’d first think.
We can debate just how much Carnival’s business was impaired by the pandemic. Perhaps cruising eventually makes an almost full recovery. There’s a path where that happens. Bears, by contrast, would argue that it will take the industry many years to get back to where it was in 2019.
In either case, there’s no world where the value of cruise lines is now more than it was prior to the pandemic. The increase in travel restrictions, vaccine mandates, and hesitancy about congregating in large groups simply isn’t a positive for cruise companies however you look at it.
And yet, judging by enterprise value, traders think Carnival is worth more today than it was in 2019. That may seems silly at first glance, after all, the price of CCL stock is down sharply since then. But enterprise value, which is a company’s total market cap plus debt, is actually greater today ($44 billion) than it was at the end of 2019 ($40 billion).
How has that happened? For one, Carnival issued approximately 400 million shares of stock during the pandemic to raise capital. That added a ton of outstanding shares to the mix and greatly diluted prior owners. For another, the company took on a bunch of debt to survive during the downturn. Once you account for these facts, Carnival is actually rather expensive compared to pre-Covid levels despite its earnings outlook getting materially worse.
CCL Stock Verdict
Purely from a stock price basis, CCL stock might seem cheap. But when we take a closer look at the numbers, it’s actually clear that Carnival shares are terribly expensive compared to their prospects.
In 2020 and early 2021, valuation wasn’t important. That was the GameStop (NYSE:GME) and AMC (NYSE:AMC) era, when speculators would bid up stocks for the memes or whatnot. Nowadays, however, valuation matters again. GameStop and AMC have both plunged roughly 80% from last year’s highs. Carnival could well follow suit as investors realize that CCL stock has a major leak in its balance sheet.
On the date of publication, Ian Bezek 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.