- Carnival Cruise Line was damaged tremendously by the once-in-a-lifetime pandemic.
- As cruises resume, the company must begin to turn the tide for investors.
- What are the company's prospects in 2022 and beyond?
Carnival Corporation (NYSE:CCL), commonly Carnival Cruise Line, is an operator of cruise ships and other travel and leisure enterprises worldwide. It operates the popular Carnival and Princess lines, among others. The stock was devastated during the pandemic, however the stock price has proved quite resilient lately. Many investors feel this could be a turnaround play leading to huge gains in the future. The stock price appears more discounted than it is and the stock continues to be extremely risky even as sailing resumes in earnest. This turnaround play is not what it seems.
Carnival Stock In 2022
Before looking ahead, it is important to look at how we got here, and what exactly "here" looks like. It is an odd experience to listen to old podcasts or read articles from March and April 2020. We were looking forward to life as normal by June of 2020.
Carnival Cruise Line announced on April 13 another extension on its voluntary suspension of cruise operations. At the moment, the cruise line plans on resuming cruises in North America on June 27, 2020.
Since then the dates for resumption have seemed to be endlessly extended, followed by limited sailing with heavy restrictions. The CDC has recently extended certain COVID-19 protocols, which were set to expire November 1, 2021, to January 2022. Vaccines and other protocols have finally seemed to turn the tide and CCL is once again bringing in much needed revenue after four straight quarters of revenues below $50M. This for a company used to earning more than $4B in top line revenue each quarter.
The graph below from February 1, 2020 to July 1, 2020 shows how the stock price and revenue dropped off a cliff in late February 2020. Revenues dropped more than 85% during this short period. Truly a once-in-a-lifetime event - or so we hope.
Extending the graph further, it shows that there is a glimmer of hope in the recent revenue results. Still far below optimal, but nonetheless improving. The company generated over $540M in the most recent quarter.
While the pandemic was a crushing blow, CCL stock's problems did not start in February 2020. In fact, the stock had underperformed the market significantly since the beginning of 2018 or a full two calendar years before COVID-19.
The graph above shows the stock's underperformance against the S&P 500 from January 1, 2018 to February 1, 2020. To put it another way, an investment of $10,000 on January 1, 2018 would be worth $12,520 including dividends if invested in the SPY and only $7,045 invested in CCL stock. Anemic revenue growth and tepid operating income growth were the likely culprits. The company was producing impressive cash from operations, however this is generally eaten up by extremely large capital expenditures (CAPEX) each year due to the nature of the industry. What wasn't used in CAPEX was paid in dividends creating a prototypical value trap. As shown below, the stock seems to trade quite cheaply on a price-to-earnings (PE) basis, yet continued to decline and underperform the market. All of this was before COVID-19.
Can Carnival Stock Rebound Next Year?
CCL stock has severe headwinds in order to recover in 2022 and beyond. First, the company issued significant debt to stay afloat during the last several quarters. This debt must be serviced. As of August 31, 2021 the company had a whopping $31.2B in short-term borrowing and long-term debt on the balance sheet. To put it another way, the company now has more debt on the balance sheet than EBITDA produced in the seven years prior to the pandemic combined.
It is not all dark skies ahead for the company.
Q3 FY21 had several encouraging signs. First, revenue is finally showing a heart beat. At $546M for the quarter it is still down an incredible amount, however well above Q2 FY21 and certainly up exponentially year over year. Unfortunately, interest expense was over $418M.
Next, the company finished the quarter with over $7B in cash on the balance sheet. This will be critical to servicing the debt, giving creditors assurances, and being able to spend what is necessary to begin operating at full capacity in 2022. To this end, the company has reduced interest payments by $67M per quarter and extended payment terms on $4B in debt.
Occupancy reportedly increased from 39% in June to 59% in August. Finally, and perhaps more encouraging of all, the company reports that advanced bookings for 2022 are trending above 2019 figures. CEO Arnold Donald had this to say, emphasis mine:
Beyond the enthusiasm of our guests and crew and the unprecedented net promoter scores, it is difficult to demonstrate just how successful our restart effort has been because many cruises, while generating positive cash flow, were limited to scenic cruises without ports of call, and generally priced well below the attractive destination rich cruises we normally offer. Carnival Cruise Line resumed operations in July offering Caribbean and Alaska sailings somewhat comparable to prior years and achieved 20% higher revenue per PCD (passenger cruise days) than 2019 peak levels...
-Arnold Donald, CEO
This is great news. The big question will be whether it will be good enough to overcome the balance sheet obstacles and reward shareholders more than the broader market.
Is CCL Stock A Buy, Sell, or Hold?
CCL stock is down nearly 50% since February 1, 2020. This makes it seem like a potential multi-bagger as a turnaround play. If the company can capitalize on pent-up demand it could soar. However, there is another side to this. Carnival did not just fund its pandemic operations with debt. They also funded it with equity financing, or, issuing shares.
Since just prior to the pandemic through last quarter, the average shares outstanding has risen 65%. Because of this, the stock is not nearly as discounted as the share price would have one believe. In fact, the market cap is only 16% lower than February 1, 2020. Add in the debt on top of this and the enterprise value is actually 17% higher than it was just prior to the pandemic. These metrics are each graphed below.
I love a good turnaround play and understand if investors are intrigued by an industry that could make a huge comeback; however, for my money the discount, or lack thereof, does not justify the risks involved. There is a risk that COVID-19 produces another variant which is vaccine resistant. Or revenues could not return in full and the debt burden may prove too great. This could cause even more shares to be issued or worse, a reorganization which would wipe out shareholders. The United States and the world could fall into economic turmoil due to supply chain problems and inflation. Or the pent-up demand could simply not materialize. The stock could also continue its pre-pandemic underperformance of the market. With each issue cited above, one would expect a much deeper discount to justify the risk of capital. That simply isn't the case at this price.
According to Seeking Alpha's Wall St. Analysts Ratings, analysts are mixed on the company's prospects. Six are very bullish, while three are very bearish. The plurality come in at neutral. The average price target of $28.20 implies more than 25% upside.
I would not be surprised to see the stock shoot up at some point on news of the first multi-billion dollar revenue quarter or perhaps 90%+ occupancy, however in the long-run I do not see this having staying power to beat the market. There are many better opportunities in the market with companies generating tremendous free cash flows and other quality metrics. The debt load and increased share count have skewed the risk/reward profile of this potential turnaround play against the equity investor.
This article was written by
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