The bad news for Carnival Corp (NYSE:CCL) stock just keeps on coming.
The Centers for Disease Control and Prevention says it investigated a Covid-19 outbreak on a Carnival cruise ship. That led to the erosion of all positive price momentum. This comes just one week after Bloomberg issued a warning regarding the company’s debt load.
Carnival stock fell sharply after analysts raised concern about weak sales and the growing risk of economic problems worldwide.
Morgan Stanley (NYSE:MS) joined the chorus and has sounded the alarm on CCL stock, slashing its price target from $17 to $13 while maintaining an Underweight rating. Morgan Stanley analyst Jamie Rollo cited the three biggest risks for Carnival to investors: weak sales, growing threats of economic instability, and soaring interest expenses.
This comes just a few days after Bloomberg’s Lisa Lee categorized the cruise-ship operator as a “zombie firm.”
According to the article, “zombie firms” are companies with no chance of turning a profit but have significant debt, thanks to too much easy credit and central bank largesse. With interest rates increasing and banks raising lending standards, “their time may be running short,” per Lee.
Hence, a weak balance sheet, the Covid-19-related PR disaster, and rising interest rates have combined to make CCL stock very risky. Therefore, I cannot recommend purchasing the stock at this time.
A Closer Look at CCL Stock
The cruise industry has been struggling with the effects of the pandemic, but things are getting better. The cruise lines have been attracting more passengers with new activities and amenities, such as onboard fitness centers, paddle boards, and aqua parks.
The pandemic severely impacted its business. People were afraid to travel due to the rampant spread of coronavirus, and cruise lines took a big hit. The CDC came down exceptionally hard on cruises because they were the epicenter of the early outbreaks.
However, things were looking up for Carnival Cruises recently. The cruise operator said it is back up and running in full force with its 23 ships.
Unfortunately, CCL stock has continued to dip after the CDC released an update about cases of a cruise ship. The ship arrived on May 3 with cases of Covid-19.
The timing could not have been worse. Cruise lines like Carnival have had to borrow money to stay afloat during the pandemic shutdowns. These companies were looking forward to the clearance from the CDC to return to profitability.
Debt and Profitability
Carnival’s debt has reached a whopping $36 billion, and analysts are worried. Cruise industry experts are questioning whether the conditions are right for the industry. This year should have marked a return from the once-in-a-lifetime event of the pandemic.
However, the CDC is actively investigating multiple cruise ships for coronavirus cases. Under these circumstances, you can not expect cruise companies to remain thriving.
The invasion of Ukraine has also led to more uncertainty. As the cost of international passenger volumes increased, Carnival noted in their first-quarter earnings report that they had seen a “material impact” on their business.
Carnival is projecting a loss for Q2 and the entire year. To reverse their fortunes, cruise lines are increasing the prices on all their cruises.
While the demand for Caribbean cruises is still strong, some parts of the vacation industry could be in trouble soon.
That is not great news, especially considering the debt load it has racked up. According to the latest figures reported in February, Carnival has a debt load of $36.23 billion, which has grown from $9.7 billion at the end of 2019.
With mounting interest rates and a lack of income, Carnival will continue to be under pressure.
CCL Stock Is Too Risky Right Now
The pandemic has receded to the background, but it is not going away. There are still many places in the world where this disease is present. Nevertheless, cruise stocks entered the year in high spirits. That feeling is dissipating for a number of cruise companies, and CCL is one of the biggest casualties.
With the easy credit disappearing, Carnival is in serious trouble. Therefore, if you have this one in your portfolio, it is time to sell.
On the publication date, Faizan 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.