Stocks to sell

Carnival Stock Could Be Heading for More Choppy Waters

This was supposed to be a comeback year for Carnival (NYSE:CCL) stock, but the world’s largest cruise operator already seems to be taking on water.

Carnival (CCL) cruise ship on water in front of beach with chairs

With only four cruise ships that have resumed operations so far, the company cannot gain momentum during the peak summer season.

Last week, a U.S. Court of Appeals ruling reversed a previous decision from the Centers for Disease Control and Prevention (CDC).

The court declared that the CDC cannot enforce restrictions on whether cruise lines can carry unvaccinated passengers. The reversal implies that Carnival is now free to sail from Florida with unvaccinated passengers.

While the decision brings the company closer to reopening its business and getting its revenue rising again, investors are uncertain about Carnival’s near-term prospects. Therefore, CCL stock has seen significant volatility in recent days.

The stock currently hovers around $22, up 4% year-to-date (YTD). It trades close to 30% lower than its 52-week high of $31.52 in early June. However, despite the recent pullback, the stock has gained over 60% in the past 12 months.

Some consider CCL stock as an appealing laggard that has yet to recover from the pandemic, while others believe the stock should be avoided at all costs.

The recent surge in coronavirus cases due to the delta variant gives even bullish investors a pause on their optimism. After a lost summer in the previous year, things may only marginally get better for Carnival this year. Here’s why.

A Closer Look at CCL Stock

Carnival is the largest global cruise company. Its brands include Carnival Cruise Lines, Princess Cruises, Holland America, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia.

The company also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon.

According to Carnival’s Q2 financials covering the March-May period, revenues came in at only $50 million, compared to $740 million in the prior-year quarter.

The company’s monthly average cash burn rate for the first half of 2021 stood at $500 million, better than the company’s previous forecasts thanks to proceeds from ship sales and working capital changes.

Adjusted net loss stood at $2.0 billion, or $1.80 loss per share. CCL ended the second quarter with $9.3 billion cash and short-term investments.

Too Early To Bet on Carnival’s Recovery

Carnival is planning to resume sailing with 42 of its ships by November. That represents more than 50% of its total fleet. Travelers are responding enthusiastically, as advanced bookings for cruises departing in 2022 have surpassed 2019 levels.

According to the company’s announcement, booking volumes for all future cruises during the second quarter came 45% higher than booking volumes in the previous quarter.

Carnival currently faces $32 billion in debt, much more than the $9 billion in cash and short-term investments it has on hand. Its debt load also significantly exceeds Carnival’s $20 billion in stockholders’ equity.

The company has recently announced that it is selling first-priority senior secured notes totaling over $2.4 billion. The company will use the issue to purchase around $2 billion worth of a previous batch of notes, saving the company $135 million annually in interest expenses.

Analysts contend that the new debt offering should provide the company with five extra years of breathing room to get back on its feet.

The Bottom Line on CCL Stock

Cruise operators are expected to be the first in line to get hit by new coronavirus variants and the last to recover from the adverse effects of the pandemic.

The rapid spread of the delta variant makes it highly unlikely that Carnival can restore its revenues and profits to pre-pandemic levels in the near term. The company continues to burn through $500 million in cash every month.

Bullish investors bidding up CCL stock without concern for the pandemic’s long-term damage may be playing a dangerous game. They are betting that Carnival will set new records in terms of revenue and net earnings and that it has feasible means to sustain its $32 billion debt.

As a struggling company with significant headwinds on the horizon, CCL stock does not look undervalued at about 1.50 times its book value, as it was already selling for a P/B ratio of 1.4 before the outset of the pandemic. The stock trades at almost 160x its current sales.

Therefore, we’d avoid the stock at these levels for now. The market offers plenty of other opportunities for investors. However, a further decline toward the $20 level or even below would improve the margin of safety.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.