Is Carnival Stock A Buy As Cruising Industry Reopens?

by Trefis Team
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Carnival Corp. (NYSE:CCL), the largest U.S. cruise operator, has seen its stock rally by almost 20% over the last month, driven by positive news on multiple fronts. Carnival confirmed that sailings from U.S. ports would begin on the Fourth of  July weekend, with its Carnival Vista ship sailing from the Port of Galveston, Texas on July 3, with another ship likely to sail from Florida later in July. Moreover, Carnival will also resume its Alaska sailings in July, after Congress passed the Alaska Tourism Restoration Act which temporarily enables cruise ships to sail to Alaska, bypassing a legal requirement to make a stop at ports in Canada. Cruise companies had previously canceled their trips to Alaska, a popular summer cruising destination. The U.S. CDC also updated guidelines for cruises in late May, noting that cruise liners with at least 95% vaccinated passengers and crew on board will not be required to wear a mask or maintain physical distance in any areas. The move could enhance confidence that cruises are safe and help to drive demand to an extent.

Now while the end of the company’s over-year-long cruising hiatus is finally in sight, we still think that 2021 will be a year of transition, with  Carnival taking a measured approach to its cruises through the re-opening. Consensus estimates point to revenues of under $4 billion this year – about 30% below 2020 revenues. However, things should improve considerably in 2022, with sales likely to surge to about $18 billion, just slightly below pre-pandemic levels, driven by higher demand and stronger ticket pricing. While Carnival’s higher levels of leverage remains a concern (debt, net of cash stood at about $20 billion last quarter, up from levels of around $11 billion prior to the pandemic), the risk is probably priced in, considering that the stock remains down by almost 45% from its 2019 highs.

Our analysis on Carnival Stock Chances Of Rise provides an overview of Carnival stock’s performance, how it compares with peers, and the probability that it will rise in the coming month.

[5/16/2021] Carnival Stock Updates

Carnival stock (NYSE: CCL) has surged by about 10% over the last two trading days, as the U.S. Centers for Disease Control and Prevention noted that fully vaccinated people can stop wearing masks outdoors and in most indoor settings, while also removing the need for social distancing. Although the new guidelines didn’t specify whether masks and social distancing would be required for fully vaccinated people taking recreational cruises, the direction the CDCs is taking indicates that restrictions will very likely be eased. The CDC’s statement should also give the general public confidence that things are returning to normalcy following Covid, and this should bode well for the cruising industry, which bore the brunt of the pandemic. Separately, last week, Pfizer’s Covid-19 vaccine received final approval for use in children aged 12 to 15. This could also prove positive for the cruising business, as there could be a revival in demand from younger families.

Now while the recent developments bode well for the industry, which is likely to see some pent-up demand given that cruising has been suspended for about 14 months now, we expect the recovery to be gradual. Cruise liners are likely to miss out on much of the lucrative summer cruising seasons, as they will only resume operations from mid-July, with operations only likely to ramp up gradually. Carnival, for instance, is taking a measured approach, with only three ships likely to sail from the U.S. in July. Although 2022 is certainly likely to be stronger for the industry, we probably shouldn’t expect pre-pandemic levels of activity. For example, consensus estimates for Carnival point to about $18 billion in revenue for 2022, compared to about $21 billion in revenue the company posted in 2019.

Our analysis on Carnival Stock Chances Of Rise provides an overview of Carnival stock’s performance, how it compares with peers, and the probability that it will rise in the coming month.

[4/7/2021] What’s Happening With Carnival Stock?

Carnival stock (NYSE: CCL) has rallied by about 12% over the last five trading days, significantly outperforming the S&P 500 which is up by 2.8% over the same period. There are a couple of factors driving the gains. Firstly, the U.S. Centers for Disease Control and Prevention indicated last Friday that fully vaccinated people are likely to see low risk from travel, noting that they would no longer need to undergo Covid-19 testing or quarantines by the CDC for travel within the U.S. Moreover, on Tuesday, the CDC said that U.S. cruises could possibly resume by mid-summer after Carnival threatened to relocate some of its ships to other markets. These developments are likely giving investors hope that the U.S. cruises which have largely been suspended since last March, should re-open in the near term, while potentially boosting confidence for customers. So is Carnival stock poised to rally further or is a correction looking imminent? Based on our machine learning engine, which analyzes Carnival stock’s historical price movements, the stock has a 52% chance of a rise over the next month, after rising by about 12% over the last five trading days. See our analysis on Carnival Stock Chances Of Rise for more details.

So what’s the longer-term outlook for Carnival stock? Although the gradual opening up of the industry and pent-up demand for cruises bodes well for Carnival’s revenues, the company is likely to continue burning cash for at least a few more quarters as it ramps up operations and gets its fleet sailing. The CEO of Carnival has also indicated that he doesn’t expect a return to pre-pandemic revenue levels before 2023 at the earliest. Longer-term profitability also remains a concern. The company’s debt has jumped to around $27 billion as of the end of last year and interest costs have also soared by about 4x to about $895 million for 2020, and it’s only likely that it will rise further this year as the full impact of debt raised through the pandemic is seen.  That said, the stock still remains down by more than 50% from its pre-Covid highs, possibly making the risk to reward proposition somewhat attractive for investors.

[3/25/2021] What’s Happening With Carnival Stock?

Carnival (NYSE: CCL), the largest cruise operator, has seen its stock rise by about 15% since the beginning of 2021, trading at levels of around $25 per share currently. The gains are driven by a decline in Covid-19 cases and a higher rate of vaccinations in the U.S. However, the stock is down by about 8% over the last month, on account of the broader market sell-off, and the company’s move to cancel or postpone cruises due over the next few months, with a resumption of  U.S. operations only looking likely around Q3 2021. So is the stock poised to see further gains from here?

Carnival stock remains down by about 43% from levels seen in mid-February 2020 when the markets were at their pre-Covid highs. While the stock could see some gains as the company resumes sailing, we don’t think it will return to pre-Covid levels any time soon. (See our dashboard on how Carnival stock performed during the 2008 recession vs. the Coronavirus crisis) Demand is only likely to gradually pick up and it could take a while before people warm up to cruising even after being vaccinated. Moreover, Carnival sold off roughly a fifth of its fleet through the pandemic and this means that even if demand recovers quicker than expected, supply could be limited. The CEO of Carnival has also indicated that he doesn’t expect a return to pre-pandemic revenue levels before 2023 at the earliest. Now Carnival is better capitalized compared to its other cruise line peers, holding about $9.5 billion in cash as of the end of Q4 2020. However, the company’s debt has soared to over $27 billion and this is likely to limit long-term profitability. For perspective, CCL’s interest costs soared by about 4x over the last year to $895 million for 2020, and it’s only likely that it will rise further this year as the full impact of debt raised through the pandemic is seen. The company’s debt ratings from both S&P Global and Moody’s stand at junk levels meaning that it has to raise debt at higher rates.

[2/19/2021] Carnival Stock Updates

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.

[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.


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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