Carnival Cruises Tanked Last Week: Is It Time To Buy?

The stock of cruise operator Carnival Corp (NYSE:CCL) tanked nearly 15% in the last 5 trading days, while the S&P 500 fell only -1.3%. Why? Simply because the company is doing a little worse than expected – announcing disposal of 12% of its capacity. However, the flip side is that its cash burn in the 3rd quarter is likely to come down by 35% compared to the 2nd quarter. So what happens next? Does this move suggest further downside or is this a good time to buy? We think that while in the short run the stock may fall, it is likely to be a good long-term bet.

We arrive at our conclusion by assessing Carnival’s recent market movement from three perspectives:

1. Relative positioning in the market
2. Underlying financial trends, and
3. The output of the Trefis machine learning engine which looks at past patterns to predict near term behavior.

Our dashboard Big Movers: Carnival Moved -14.2% – What Next? lays this out.

What relative positioning suggests: Are you a value investor who identifies and invests in under-priced securities based on market comparisons? Then this might be important to you.

Carnival’s stock price decreased -64.5% this year, from $50.24 to $17.85, before moving -14.2% last week, and ending at $15.31. At the beginning of this year, Carnival’s trailing 12 month P/S ratio was 1.66. This figure decreased -43.7% to 0.94, before ending at 0.8. So the stock is now selling at half the price as the beginning of the year, and that’s because there is uncertainty around future growth. However, this conclusion is incomplete without peer comparison. Compared to Carnival’s P/S multiple of 0.8, the figure for its peers Royal Caribbean Cruises and Norwegian Cruise Line Holdings stands at 1.78 and 0.96 respectively. While the whole cruise line industry has suffered, it appears that the market has punished Carnival more. As the demand recovers and cash burn reduces, the relative positioning suggests upside for Carnival.

What fundamentals suggest: Want to consider long term investment? Then pay attention here.

Carnival’s stock price decreased -14.2% last week. In comparison, the stock has decreased -17.2% between 2017 and 2019, and has decreased -74% between 2017 and now. This implies that the recent move is in line with long term trend. But do the trends in the underlying fundamentals support this? Carnival’s revenue has increased from $17,510 Mil in 2017 to $20,825 Mil in 2019. For the last 12 months, this figure stood at $16,844 Mil, implying a decrease of -19.1% over 2019 numbers. But that’s expected considering the complete halt in cruise operations during the second quarter of this year. As far as margins go, history suggests that Carnival has the capability to maintain profitability while growing its top line. Its net margins stood at 14.9%, 14.9%, and 14.5% in 2017, 2018, and 2019 respectively. However, for the last 12 months, this figure dropped to -17.5%, which is not surprising. Excluding the impact of Covid – the underlying financials show consistent and stable growth. Couple that with financial resilience of Carnival Corp, as we discuss here, and we have a stock that may be worth investing long-term in.

What machine learning algorithm suggests: More interested in short term returns? Then you might want to give this perspective more weight.

Our AI engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period and suggests about a 33% probability of Carnival rebounding 10% over the next 21 trading days. Compared to this, the probability of tanking further by -10% is 39%, suggesting a slightly greater likelihood of downside. Our detailed dashboard highlights the chances of Carnival’s stock rising after a fall and should help you understand near-term return probabilities for different levels of movements.

Taking all 3 perspectives together, we believe that Carnival can give good returns to patient investors. But, what if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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