What’s Happening With Carnival Stock?

Carnival (NYSE: CCL), the largest cruise operator, has seen its stock rise by about 12% since the beginning of 2021. Here’s a quick rundown of some of the recent developments for the company. Firstly, Carnival has continued to push back its cruising timeline. In late January, the company said that it had paused departures from the U.S through the end of April, and canceled Australian operations through mid-May, although a few of its ships are likely to be cruising again in Europe around March. Overall, we think it’s safe to assume that the company’s operations will pick-up in a meaningful way only later this year, by when a bulk of the U.S. population is likely to be vaccinated against Covid-19. This would mean that the company is likely to miss out on the Summer cruising season, which is typically the busiest.

Earlier this month, Carnival said that it would raise an additional $3.5 billion in debt via senior unsecured notes that mature in 2027 at a rate of 5.75% a year. Although the company ended the last fiscal year with cash and cash equivalents of $9.5 billion, giving it about 18 months of liquidity based on a Q4 cash burn rate of $500 million per month, Carnival isn’t taking any chances, considering that it could take a while before business gets back to pre-Covid levels. Moreover, the company is likely to also incur significant restarting costs as it resumes operations. To be sure, while issuing debt de-risks the company’s business in the near-term, we think it will significantly cap long-term returns for stockholders. Including the recent debt issue, Carnival would have raised over $22 billion in liquidity over the past 12 months alone and interest costs are likely to weigh on the company.

See our dashboard on how Carnival stock performed during the 2008 recession vs. the Coronanivurs crisis.

[1/4/2021] Why Carnival Stock Is Unlikely To $40 Levels In The Near Term

Carnival (NYSE: CCL) stock has jumped by almost 60% over the last two months, as investors viewed news surrounding the efficacy of Covid-19 vaccines and commencement of dosing in the U.S. as a sign of the beginning of the end of the Covid-19 pandemic. The jump in the stock price is largely warranted, considering that Carnival and other cruise stocks have been bearing the brunt of the pandemic. Carnival suspended cruises in March 2020 and was burning cash at a rate of around $770 million a month as of Q3. With the pandemic-related uncertainty reducing, are further gains in the cards for Carnival stock, which still remains down by about 50% from February 2020 levels?

We think it’s unlikely that it will reach the $40+ levels seen in February 2020 anytime soon for a couple of reasons. While Carnival was initially looking at setting sail from U.S. ports in late 2020, it has pushed back its timelines as coronavirus infections in the U.S. continue to soar, and its cruises are paused at least till the end of February 2021. Additionally, the vaccine rollout in the U.S. is also not progressing as quickly as expected due to initial hiccups. Even when Carnival resumes its operations, it remains uncertain as to how quickly demand will pick up. The removal of capacity from its fleet and delays in new ship deliveries could also limit supply. More importantly, longer-term profitability remains a concern. Carnival has doubled down on debt (total debt of around $21 billion as of Q3, up from around $11 billion last year) through the pandemic to fund its massive cash burn, and this will lead to higher interest costs, which is likely to reduce profitability. We compare Carnival stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

[Updated 10/28/2020]

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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