Carnival (NYSE:CCL) is an outlier in the market right now. Investors increasingly are pricing in a return to normalcy, yet CCL stock doesn’t seem to have benefited much from that change in perspective.
To be sure, CCL stock has doubled from March lows. But it’s still down over two-thirds from January highs. Elsewhere in the market, the news is much better.
The Invesco QQQ Trust (NASDAQ:QQQ), which tracks the tech-heavy Nasdaq 100, has nearly reclaimed its highs. The broader Nasdaq Composite is positive year-to-date. Even the S&P 500 is off just 5% in 2020.
In many sectors of the market, investors basically are forgiving any 2020 weakness and looking ahead to 2021 and beyond. That’s a wise strategy, one I’ve recommended through both the broad market selloff and the recovery. Yet, at least judging by the share price, CCL stock isn’t getting the same treatment.
I’d argue that investors are taking the long view with Carnival, however. This crisis has changed Carnival and the cruise industry — likely for good. That’s why CCL stock remains so far below early year highs, and why it’s likely to stay there.
2020 and 2021 Matter
One key issue for Carnival is that the short-term impact of the coronavirus has been material to the share price. And that’s not the case for most companies.
For a normal company, there’s an effect. Obviously, it’s not positive to lose a quarter’s worth of earnings due to the pandemic, or to see 2020 profits drop 20% or even 50%.
But it’s a manageable effect. With stocks valued on all of their future profits, a lost quarter or three simply doesn’t suggest a ruinous impact on the value of the business.
Carnival is different. It’s impossible right now to measure precisely how much the crisis has cost the company. But the figure no doubt is in the many billions of dollars.
Lost earnings alone are significant. Coming into this year, Wall Street expected Carnival to generate almost $5 per share in profits in 2021. Consensus estimates now suggest earnings of just 3 cents. Even that figure seems potentially inflated by the fact that some analysts haven’t yet updated their projections.
Assuming the profit impact lingers into 2021 and beyond, Carnival’s earnings well could have taken a $10-plus per share hit just in the mid-term.
And cruises extended for weeks due to quarantines no doubt cost hundreds of millions, if not billions, of dollars more.
For many stocks, taking the long view suggests a current price closer to early-year highs. That’s simply not the case for CCL stock.
The Long-Term Problem for CCL Stock
Beyond the short-term effects, there are long-term concerns as well. The cruise industry will be irreparably changed — and irreparably damaged.
Consider what cruise ships were selling as recently as February. All-you-can-eat self-serve buffets. Crowded swimming pools and water slides. Packed theaters.
Many of those attractions are going to be out for at least a few years. We’ll get a coronavirus vaccine, and we’ll move on to some semblance of normalcy. But there will be consumers fearful of the “next” pandemic — and likely significant changes to how we live going forward.
If the experience isn’t as good, demand isn’t as good. And that’s a huge problem for Carnival and rivals like Royal Caribbean (NYSE:RCL). This is a business with high fixed costs and high incremental margins.
That is to say, it’s the last few passengers that provide all the profit. The cost of sailing is largely the same whether a boat has 2,000 passengers or 1,500. There are some savings with a smaller crowd on food, labor and the like — but hardly enough to offset the dramatic drop in revenue.
The cruise industry needs full boats to maximize its profitability. I’m skeptical it’s getting those full boats any time soon, due to both demand and to the changing nature of the business itself.
On the Sidelines
Those headwinds might seem priced in by the two-thirds decline in CCL stock. But investors can’t ignore the balance sheet.
Carnival’s billions of dollars in debt and many more billions in commitments amplify the short-term pressure on the equity. This is a business that on the whole seems worth significantly less than it was in January. At the same time, it has more debt.
That’s the core problem. The value of CCL stock is getting squeezed from all sides. Carnival has lost billions in value, added billions in debt and diluted shareholders.
From that perspective, the fact that Carnival stock hasn’t rallied makes much more sense. The issue isn’t that investors aren’t pricing in a return to normalcy; it’s that the normalcy they see suggests a business whose best days are in the past.
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.