Carnival (NYSE:CCL) stock is down 14% today after investment bank Morgan Stanley outlined a case against the cruise ship operator.
In a note to clients, Morgan Stanley analyst Jamie Rollo cut his price target on CCL stock and warned that another demand shock could send the shares to $0. That harsh assessment surprised investors, leading to a steep drop today. So far this year, Carnival’s share price has fallen more than 55% to just under $9 per share.
Here’s what investors should know.
What’s Happening With CCL Stock?
In the note, Jamie Rollo lowered his price target on CCL stock to $7 per share, down from $13 previously. Rollo also outlined a “new bear case” for the company:
“If the high yield market closes, and/or if there is a demand shock that causes trip cancellations or weak bookings (and hence customer deposit outflows), liquidity could quickly shrink […] Even then, leverage looks unsustainably high […] with net debt remaining >$30bn for the foreseeable future, nearly triple its pre-Covid level. We think this needs to come down […] to ~$20bn or so, which implies a ~$12bn equity raise. This is similar to CCL’s market cap, so could require a material, and therefore likely very dilutive, discount.”
Rollo also cut his revenue forecast for Carnival in the second half of this year by 15%. The cut is meant to reflect “weaker than expected occupancies, weakening pricing, elevated unit costs, and higher fuel costs.”
This downgrade from Morgan Stanley comes days after Carnival reported disappointing second-quarter earnings. For the period, the company announced a loss of $1.61 per share, wider than the estimated loss of $1.08. Revenue came in at $2.4 billion as well, up almost 50% from Q1 but “below projections for $2.76 billion.”
Why It Matters
It is unusual for an analyst to predict that a stock could fall to $0. Clearly, though, this analysis from Morgan Stanley has spooked CCL stock investors.
This analysis reflects the extremely difficult time that the entire cruise industry has faced since the onset of the pandemic. Carnival, which is the biggest cruise company in the world, has lost billions since March 2020.
While there have been reports of a recovery in the cruise industry, the sector has largely moved in fits and starts as restrictions ease in some parts of the world and get reimposed in others. Morgan Stanley’s assessment highlights not only Carnival’s debt load, but also some continued issues for the company. These include high inflation and elevated fuel prices, which could impact its bookings and costs this year and next.
The median price target on CCL stock is currently $14 per share, implying a potential 60% gain from current levels.
CCL stock is taking a beating today on the extremely pessimistic analysis of Morgan Stanley. Whether things will get as bad for Carnival and its shareholders as the firm forecasts remains to be seen. But, given the ongoing problems facing the industry, investors don’t appear very interested in taking a chance with CCL today.
On the date of publication, Joel Baglole 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 InvestorPlace.com Publishing Guidelines.