Carnival Stock Poised For Big Rebound Post Covid?

There could be a sizeable upside to Carnival (NYSE:CCL) post the Covid-19 pandemic if the company navigates its current challenges and sees demand pick up by 2021.  The stock trades at about $15 currently and has lost about 70% of its value year-to-date, as the Coronavirus pandemic essentially brought the cruise line business to a standstill. Cruises from the U.S. have not sailed for the last seven months or so, although most cruise companies are looking to resume some level of operations from December. The stock traded at about $44 per share in February, as the markets peaked pre-Covid, and is about 65% below that level presently. That said, the stock has gained about 28% from lows seen in March 2020, driven by some progress in shoring up its liquidity and the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market, in general, recover to a large extent. Our analysis of the company’s upside potential is based on our detailed analysis comparing Carnival’s stock performance during the current crisis with that during the 2008 recession.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
• From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Carnival vs S&P 500 Performance Over 2007-08 Financial Crisis

CCL stock declined from levels of around $49 in October 2007 (the pre-crisis peak) to roughly $20 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 60% of its value from its approximate pre-crisis peak. This marked a higher drop than the broader S&P, which fell by about 51%. However, CCL recovered strongly post the 2008 crisis to about $32 by the end of 2009 rising by 62% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

CCL Fundamentals In Recent Years Looked Good, But Present Situation Is Very Challenging

Carnival’s revenues rose from about $16.4 billion in FY’16 (fiscal years end November) to about $21 billion in FY’19, as demand for cruises rose. The company’s earnings also grew sharply over the period, rising from around $3.70  per share to about $4.30 per share. However, the picture has changed dramatically over 2020. CCL reported a 99.5% year-over-year decline in revenues for the quarter ended August 31, with Net Loss standing at about $2.8 billion. Full-year sales for FY’20 are likely to fall by over 70% and it’s very likely that it could take over a year for Revenues to return to pre-Covid levels, assuming that there are no major changes in consumer behavior. However, it’s likely that customers will remain somewhat apprehensive about cruises for some time after the pandemic, considering that the U.S. CDC has indicated that cruise passengers are at increased risk of the person-to-person spread of infectious diseases.

Does CCL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Carnival’s total debt has increased from roughly $9.5 billion in FY’16 to almost $25 billion at the end of Q3 FY’20, while its total cash increased from about $600 million to $8.2 billion over the same period, as the company raised funding to tide over the crisis.  While the company’s cash flows from operations grew from around $5.1 billion in 2016 to $5.5 billion in 2019, with operations now largely suspended, the company has been burning through cash with burn projected at an excess of $500 million each month over Q4. Although Carnival’s cash cushion appears to be sufficient at present, if it doesn’t set sailing by the Summer of 2021, with occupancy levels picking up, things could get tough. There are significant longer-term concerns as well, with the company’s mounting debt load, profitability is likely to be a concern given the higher interest burden even if demand recovers considerably.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally.
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand and progress with vaccine development buoy market sentiment. 

While Carnival stock rebounded strongly post the 2008 financial crisis, things could be different this time, considering the severe cash burn rate it is currently facing, uncertainty regarding how quickly demand will pick up post the pandemic, and the massive debt load which is likely to restrict profitability in the longer-term. That said, if the pandemic wanes and demand starts to recover, the stock could rebound meaningfully although we think it’s unlikely that it will reach the $40+ levels seen in February anytime soon.

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