Few stocks have been hit as hard as the cruise companies, with Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH) all hammered over the past several weeks. Some view the 84.8% peak-to-trough decline in CCL stock as an opportunity; others view it as a warning.
The cruise business is very susceptible to the outbreak of the novel coronavirus. Not only are countries across the world on lockdown, but very few people are making it a point to travel at this time. Certainly not for vacation.
That’s left the cruise industry in a difficult position, with their fleets remaining at port. Not only are they facing a virtual freezing of cash flow and revenue as a result of this economic halt, but they are being inundated with refund requests by customers with cancelled or delayed sailings.
Good News For CCL Stock (For Now)
There is some good news for Carnival. Because the industry is incorporated outside of the United States, the company does not appear to be eligible for emergency funds from the government in the same way that companies like the airlines are.
However, Carnival was able to secure funding for its operations. The cruise line halted its buybacks and dividend, cutting off a source of cash flow bleed. It also raised $5.75 billion worth of debt and sold $500 million worth of stock at $8.
With $6.25 billion of cash flowing into Carnival’s hands, it will have enough capital to fund its operations for some time. That should alleviate investors’ fears of bankruptcy and help turn their attention to the future rather than keep their focus on the present. For the stock price, that should be good news.
Valuing CCL Stock
However, there’s no free lunch in this situation. The secondary offering with dilute current shareholders (although, given the circumstances, most would welcome the dilution). Further, the bond sales only add to Carnival’s debt load, with long-term debt already standing at $9.7 billion. Finally, $4 billion of that $5.75 billion debt sale comes with a double-digit coupon, hardly a low price to pay in a time of incredibly low interest rates.
The stock dilution and balance sheet strain is unfortunate, even if the Public Investment Fund of Saudi Arabia took an 8.2% stake in CCL stock.
From its low on April 2, shares already rallied a whopping 76% at the recent high. While shares are still trading at a massive discount from the 2020 highs, there are simply too many unknowns for the industry right now. Carnival took bankruptcy off the table by raising capital, even if it did so expensively, and that was a smart move. But we still don’t know when cruise lines will set sail again. More importantly, we don’t know how many people will feel comfortable doing so.
Even once revenue is moving in the right direction, it does little good if the company is generating negative cash flows. If there’s a rapid rebound in capacity and ships set sail this summer, CCL stock and others will likely enjoy a robust rebound. If not, the stocks could remain in choppy waters.
No Fun at the Carnival
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Have a look at the chart. CCL stock has given investors a beautiful double-bottom near $8. While the stock was able to reclaim its 20-day moving average for the first time amid this decline, it’s still far from being out of the woods.
On a closing basis, Carnival was not even able to retrace 23.6% of its decline. Further, it remains under pressure from downtrend resistance (blue line). Should shares revisit the lows, it will represent a loss of more than 35%.
The bottom line is simple, which is that it’s too early to be an aggressive buyer of CCL stock. Why not instead focus on best-in-breed stocks like Nvidia (NASDAQ:NVDA) or powerful balance sheet companies like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) or Facebook (NASDAQ:FB)?
CCL stock simply has too many question marks, and at current prices just does not represent enough of a bargain.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
