There Is Still Time To Buy Carnival And The Upside Is Huge

Summary

• Carnival’s business update showed increasing strength in bookings. Interest in ocean cruises after a year of lockdowns is going through the roof.
• The CDC could feel compelled to open up the cruise line sector sooner than expected. This would be a BIG catalyst for the sector and CCL.
• Carnival's outlook is improving as is the sector outlook. Revenue and EPS estimates are very low and will likely be refreshed once the reopening takes place.

Photo by jgroup/iStock via Getty Images

Reports and business updates out of the cruise line sector are increasingly bullish. Carnival Corporation (NYSE:CCL) is facing positive industry developments and a very strong booking situation. The CDC could reopen the cruise line sector sooner than is now priced in. The risk profile remains heavily skewed to the upside and CCL is set to go higher.

Technical consideration

Before I jump into the latest developments for Carnival, I want to quickly revisit the technical situation of the cruise line company because shares just hit a new high.

CCL is displaying positive strength amid an improving sector outlook. The stock has been in an uptrend since November and an increase in volume after good news has been released.

CCL just hit a fresh high, $36.63, and is set to break out above its upper trend line. A breakout would clear the way for $40.

(Source: Finviz)

Potential catalyst: Will the CDC cave to demands to reopen the cruise sector earlier?

Last week I proposed that cruise line companies are undervalued because

• The booking trends in the cruise line industry are positive which is evidence of strong pent-up demand
• Valuations are depressed because of high leverage and COVID-19 uncertainty, resulting in low earnings estimates.

Related to that, Norwegian Cruise Line Holdings (NCLH) announced that it was restarting voyages outside of the US this summer and that it has petitioned the Center for Disease Control and Prevention to allow for an earlier return to business. Based on the CDC’s Framework for Conditional Sailing the date set is November 1, 2021, but the CDC has discretion to reopen the sector earlier than that if COVID-19 is no longer deemed a public health threat.

(Source: CDC)

The CDC could open up the cruise line sector earlier than expected, an event that is not yet priced into valuations and it could happen if Florida's lawsuit against the CDC is successful.

Pressure is building on the CDC to allow the sector to return this summer which typically sees the peak of the cruise season. The CDC, on the other hand, wants to keep its framework in place and has not publicly commented on Norwegian’s petition to allow an earlier return of cruise ships to US ports.

Carnival has said that it is willing to find alternative solutions to start sailing again if the CDC doesn’t ease up on restrictions … and threatened that it could relocate cruise ships away from their US home ports …

(Source: Bloomberg)

Without a doubt, the odds are improving that the CDC will allow cruise ships to sail from US ports again in the short term or at least allow a phased return of cruise ships under strict health and safety procedures.

If I had to make a guess, I would say there is a 30-40% chance in favor of an earlier reopening. Sector risks are still high here … ranging from huge debts that need to be serviced to potentially new COVID-19 outbreaks.

Carnival business update

Carnival’s shares hit a new high Thursday after the cruise line company released its newest business update … which contained important information on Carnival’s booking situation as the market prepares for a reopening.

(Source: Carnival Corporation)

Carnival’s booking situation couldn't be any better … Carnival saw a 90% higher booking volume in the first quarter compared to the fourth quarter last year. A 90% increase!

Also important: “Cumulative advanced bookings for full year 2022 are ahead of a very strong 2019 as of March 21, 2021” ... remember that 2019 was a record year for the cruise line industry.

(Source: CLIA Cruise Line Industry Report 2021)

The cruise line sector is set to destroy expectations if the CDC approves of new cruises from US ports and the industry outlook has turned decidedly positive ... Carnival's business update is only the latest example that demand for ocean cruises is going through the roof.

Despite an improved booking situation, Carnival is still not going to have a great year in 2021, but valuations grow on expectations that the outlook and business results improve in the future ... and the recovery potential in the cruise sector is significant.

Expectations, valuation and a new upgrade

The expectation is for Carnival to have $4.4b in revenues in FY 2021 and more than four times that amount, $17.3b, in FY 2022, as business is expected to operate normally again.

(Source: Seeking Alpha)

Carnival's EPS is also expected to see a sharp rebound. CCL is expected to be profitable again in FY 2022 after another expected loss of $4.9-share this year. I would expect Rev and EPS revisions once the sector is open again and uncertainty is removed... which itself could be a catalyst for CCL.

(Source: Seeking Alpha)

Carnival, despite a 35% YTD return, has more upside … with multiple potent factors working together here: The economy is going to reopen, the CDC policy could change and analysts are going to refresh their estimates once business gets going again… all of this means that Carnival could recover to its pre-pandemic bookings situation and a higher valuation… and it could do so very fast.

Carnival's historical P-E ratio has been between 10-15 ... much higher than today.

(Source: Macrotrends)

Analysts on TipRanks say CCL is a Moderate Buy with an average price target of $28.57 …

(Source: Finviz)

But this only has the story… analysts are turning more bullish on cruise line companies and Carnival received an outperform rating from Credit Suisse last week which more than doubled its price target for the cruise line company from $18 to $40 … That’s 38% upside! You can look forward to more refreshed reports on CCL once the sector reopens.

Short term, medium term and long term risks

The risks coming with an investment in the cruise sector are not negligible… and can be separated based on time horizon.

Short term, the biggest risks for Carnival are COVID-19 and a delayed reopening of the cruise sector ... and thereby an unchanged CDC policy.

Medium term, I would also say COVID-19 is the biggest risk factor if there is a COVID-19 outbreak on a cruise and quarantine protocols go into effect again. This would seriously harm the cruise industry, but a repeat of 2019 is unlikely.

Long term, Carnival’s growing debt is a risk factor and needs to be remedied as soon as the sector returns to normal.

Closing thoughts

Carnival is set to storm out of the gate when the sector reopens. The outlook for the cruise line industry in general and for Carnival specifically has turned from dim to bright. While challenges remain, Carnival’s valuation can grow on positive reopening and vaccination news, a CDC-approved earlier start date for ocean cruises and continued booking strength. A CDC policy turnaround would be a big catalyst for the sector. 2021 is the year in which the cruise line sector gets resurrected.

Analyst’s Disclosure: I am/we are long NCLH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[John Uit de Flesch]

HUGE upside!!

[segfaultnh]

"Carnival's historical P-E ratio has been between 10-15 ... much higher than today."

Not a bad article, and I have been long CCL for a long time, but this isn't really a buy signal. The P/E is zero because they are LOSING money. There's nothing about a company that is losing money that makes it a guarantee they will make money in the future.

[High Sharpe]

Between 2018 Sep and 2021 the shares outstanding went from 700 mil to over 1 bil. the long term debt went from 9 bil to 28 bil. Im sorry equity is probably toast

[Banker300]

Good article. In my view, the catalyst for the stock to move higher is the COVID19 reopening, which would be triggered by the CDC. The stock will catapult once that occurs. The big question here is when, not if. A delayed reopening may create a debt repayment issue but the market is flush with liquidity. I think this is a smaller risk since CCL can either raise equity or refinance debt in the debt markets at junk rates. Not a major issue right now.

Of course, demand for CCL's product is strong. Consumers are flush with cash and have been staying home for over a year. People want to get on with life and go on vacation!

My biggest concern is the lack of progress in vaccinations in Europe. It is clear that the most developed countries in Europe- Germany, France, etc. are behind in vaccinating their populations. Some countries (Greece and Italy) have strict lockdowns still in place. This is a major problem.

Steady state EPS is in the $4/share range, and a PE ratio of 10-15x, indicates a target price of $40-60/share.

I have not bought yet but I plan to do so this week.

[Same Old Galo]

Author....I think u have a biiig typo in your article...the recent high was $30.63, not $36.63.
I know because I kicked myself for not selling at those levels when it failed to hold them...

[kbaba]

Best to do actually math of the impact of new dilution and increased debt service plus fewer ships on potential earning per share going forward. I'd say valuation is already unrealistically high and based on positive sentiment already

[Banker300]

@kbaba Solid points. Buy on the rumor, sell on the news.

[Think Long Term]

Time to sell this fast....they won't be making money for a very very long time
The crazy ones buying this at such a lofty price and valuation will be taught a harsh lesson soon....I will buying puts very soon.....

They can't make money giving away the boats.....they can't service the massive debt load for long with no revenues...look at the promos they have been doing for over 1 year now...bookings might be up but not their revenues

Sail by April 2023

Exclusive Casino Rates
$500 Onboard Credits*
Free Drinks On Us

FREE* Interior Room
$200 in FunPlay® credits
Free Drinks On Us!†

[Banker300]

@Think Long Term The driver of demand for cruises is the retired population. These folks are chopping at the bit to get out and vacation. Selling ships only strengthens the balance sheet.

[princesscruiser]

Buy, buy, buy.

[Dan Terry]

There is no upside, you don't understand how taking on debt and diluting shares of the stock works. It is a bubble, the price all these cruise stocks are at now is equal to a record high before Covid broke out if you factor in the debt levels. I truly think the current prices are a tremendous selling opportunity because a ton of risk lies ahead when they actually start sailing again - does another diamond princess scenario happen? How many people can be packed into the cruise ship without danger? Do the vaccines hold up 6 mths or do they not work on variants? How many people still will cruise for the next couple years? It's all risks buddy and like I said, the stocks are priced way up - they could easily be trading below the lows set last spring if stuff does not go perfectly - that means like $3 a share, ooach!!

[Dan Terry]

@Dan Terry By the way, I already made my money on NCLH, got in around $9-$12 a share and sold out around $27/share. The trade is already done and the money is already won, I am not touching it now at almost $30.

[The Asian Investor]

@Dan Terry Yes there is upside...not as much as last year, but Yes. Just because they issued debt and equity doesn't mean there can't be upside ... and the news are increasingly positive.

[Sellandtrade 2012]

Just stop...

[The Asian Investor]

@Sellandtrade 2012 Why?

[metalhead]

It’s articles like these that make me shake my head at the level of ignorance of basic math and physics out there.

So there is increased booking activity ... that’s nice but I hope the author has a time machine or knows of one because in order to monetize those bookings you’re gonna need one.

That’s because we have gone a full year with zero cruises and that time cannot be printed or recreated. All those bookings are doing is keeping CCL afloat while it dilutes current shareholders and takes on more debt.

Someday there will be cruises, but those lost one will NEVER be made up! CCL will also be in no position to take on a huge demand spike if one happens at all, since they’ve offloaded 19 ships.

When things resume many of the cruises will have been paid with credits, essentially generating little revenue other than on ship purchases. CCL and other cruise lines are borrowing from the future (and an uncertain one at that) in order to stay a going concern right now.

And cruise buyers now better read the fine print on getting a full refund, and good luck with that in a chapter 11 scenario!

[mikoli007]

@metalhead Physics, wow. Talk about stupid analogies! BTW, just because you lose a hundred dollars doesn't mean you will never make a million, SMH!

[The Asian Investor]

@metalhead No, I don't think we need a time machine ... just a bit of patience and the market will reopen just as it did before. But I appreciate your comment regardless.

[D. Rider]

I wrote this (numerous times, actually in several threads on SA) last summer, but here's an example, in the Comments section (seekingalpha.com/...)

D.Rider
19Jul 2020, 5:00 AM
Comments (1.9K)
Anyone who bought into cruises: you did so knowing they would be a
decade-long (or longer) buy and hold, right? And knowing that
possibly one (or more) may have to restructure? I'm long CCL and NCLH
(both below $10) and also LIND (~$6.50). Am patiently eyeballing RCL
too. I fully expect them all to retest their lows (or even lower)
over the next 12-18 months, and thus I bought leaving plenty of $$$ room
to buy again multiple times if and when that happens. But here's the
simple thing: in investing, you only need one to survive over that
decade+, and the one that does will way than more make up for the ones
that don't. If you're day-swing trading these things, then you're
braver (and, in this old man's opinion, a bit dimmer) than me. Too
many other sectors exist which are way better for daytrading...this
industry, a few months ago, entered the full-on "lottery status."
Great thing about lottery status in Mr. Market is, he'll let one survive
and that one will go on over the decades to decimate any losses you
might had in the others with gains you cannot believe. This is what
investing is all about. Try it sometime. A little sacrifice, a little
patience, a little time (in the scheme of our lives) can produce
wonderful things. Recognize that either external and/or internal events
to the investing markets are the most incredible gifts individual
investors can get. When these events hit (this is my 5th since the
'70s), it's always the best time to be alive and investing. Put those
big boy/gal pants on, and let 'em rip. And the future will love you for
it. Best of luck to us all."

Posting this (above) is absolutely not a knock on @Stone Fox Capital , whom I consider one of the better author/article writers on SA, plus he has a great sense of humor (At Least (fill-in-the-blank) It Is Not IBM!!...hahahaha).
What I am, again---I guess trying in vain to point this out to some of you on SA--- is that posting the above IS.....most definitely IS.....a knock on all the mindless daytrading. Try this once in awhile: buy something, hold it, for years or decades, and see what you refuse to see right now.
Let the vitriol begin...... :-/

The best of fortune to us all

[mikoli007]

@D. Rider Hmmm, simple really to refute. Buy at $8 sell at $29 took way less than "decades"! More like 11 months! But thanks anyways. There are way more ways to skin a cat these days. People who think there is only one way of doing something are very limited in everything.

[rocketman3]

If you haven't already bought into the cruise lines, you've missed the boat.

[The Asian Investor]

@rocketman3 No, I don't think so. I bought NCLH last year at $14 and then again $18 and there is still room for improvement. Once cruise ships sail out again .. then it is time to sell.

[Think Long Term]

I'm not short, I just know better than to invest in a scam being pumped by analysts as bankruptcy looms....just days before Lehman folded analysts were upgrading it too....same with Bear Sterns....AIG same....when they start making absurd valuations and targets like this, its time to sell fast...

[The Asian Investor]

@Think Long Term Why would bankruptcy loom now that the sector is just about to reopen and cruises outside of the US are already going?

[toh192]

Eps will never get back to 2018-2019 levels, they issued to many more shares. Add in the debt servicing and your luckily if they reinstate a dividend by 2023.

[The Asian Investor]

@toh192 It is true they have been diluting but that doesn't mean there is no upside potential. Do you think a dividend reinstatement would be a catalyst for the stock, positive or negative? :)

[toh192]

@The Asian Investor Wow. Did you follow yesterday’s action? It does kneecap upside potential.

[andyjay]

Seeking Alpha...land of bears. CCL is going to do great. Guaranteed.

[The Asian Investor]

@andyjay I am surprised at how much criticism this gets. I made good money on NCLH so far and there is still a huge opportunity for a valuation rebound.

[earlyriser]

CCLs P/E is much lower than its 10 - 15X? Really? On what planet does that math work?

[The Asian Investor]

@earlyriser What exact question do you have. Please let me know and I will try to answer.

[nobodyneedsmoreBS]

Wrong Asian Investor- CCL hit a high of 30.63 not 36.63 so the next level if the news goes there way would be 33 and not 40!

[ETC92Guy]

@nobodyneedsmoreBS Thanks for posting. If this would have hit $36 I would have been looong gone. It's obviously a typo but squashed the article cred. I didn't bother with the rest.

[The Asian Investor]

@ETC92Guy Thank you

[GerbearWI]

When did CCL hit $36.63? Can't find it. I see it in $30 range?

[trzeuske]

One sided story that is missing so much pertinent information that is ends up trying to be a bull story to lull someone into buying CCL.

[William Darusmont]

@trzeuske Is he head of PR for CCL??? What a bunch of BS! Carnival has been chomping at the bit to reopen...fail after fail...time after time...

[The Asian Investor]

@trzeuske lull?

[The Asian Investor]

@William Darusmont CCL has surged more than 134% since last year just for your information but I see you are not here to have a constructive argument :)