Up Over 80% From Covid Lows, Is Carnival Stock A Buy?

Carnival stock (NYSE: CCL), the largest cruise line operator in the U.S., has seen its stock decline by almost 16% over the past month (about 21 trading days), compared to the broader S&P 500, which gained about 3% over the same period. The recent decline comes due to a wider than expected Q3 loss, a revised price target on the stock by a brokerage firm, and some weakness in the broader travel space amid headwinds to the Chinese economy. That said, things are slowing, but surely looking up for the leisure cruising industry, which bore the brunt of the Covid-19 pandemic. Carnival resumed sailing from U.S. ports in July and is likely to have about 50% of its fleet in revenue operations by the end of this month. Demand is also likely to look up, with Covid-19 infections in the U.S.  trending steadily lower, after seeing a big surge through the summer. Carnival has also indicated that bookings for the second half of 2022 were ahead of pre-pandemic levels.

So is Carnival stock a buy at current levels? While Carnival stock has gained about 83% from its March 2020 lows, it has underperformed the S&P 500, which has roughly doubled over the same period. Moreover, at the current market price of about $22 per share, the stock still trades at about 50% below its pre-Covid highs of about $44 per share. That said, investors need to account for higher levels of risk versus pre-Covid, given the company’s total debt has increased from roughly $9 billion in 2017 to close to $31 billion currently. The company is also seeing higher interest costs and this could weigh on profitability in the future. Moreover, with a 100% containment of Covid-19 looking unlikely and new mutations of the virus remaining a threat, there could be some revenue risk for cruise line operators, including Carnival, in the medium term.

While CCL stock has seen lower levels during the current Covid-19 crisis, how did it fare in the 2008 crisis? Our analysis on CCL 2008 vs Now compares CCL’s performance over the 2008 financial crisis versus the Covid-19 crisis.

[8/23/2021] Is Carnival Stock A Buy At $22?

We believe that Carnival stock (NYSE: CCL), the largest U.S. cruise operator, looks like a reasonably good buying opportunity at current levels. CCL stock trades near $22 presently and it is, in fact, down 55% from its pre-Covid levels of around $51 per share at the end of December 2020 – before the coronavirus pandemic hit the world. The stock recovered considerably over the first few months of this year, as growing vaccination rates and the company’s plans to resume sailing caused investors to get more optimistic about Carnival’s prospects. However, the stock declined by almost 30% since early June as the spread of the highly infectious delta variant of the coronavirus and the recent surge in U.S. infections have hurt the near-term outlook for the cruising industry. But now that the stock has corrected meaningfully to accommodate the slower than expected near-term recovery, we believe that CCL stock looks quite attractive at the current levels of around $22 per share.

While CCL stock has seen lower levels during the current Covid-19 crisis, how did it fare in the 2008 crisis? In this note, we focus on a comparative analysis of CCL stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

Timeline of Coronovirus Crisis So Far:

• 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 the S&P 500 reach a record high.
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 97% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
• 8/19/2021: Around 60% of the U.S. population has received at least one dose of the Covid-19 vaccine, while 51% of the population is fully vaccinated.

In contrast, here is how CCL stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in 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 S&P 500 index
• 12/31/2009: Initial recovery to levels before 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 Challenging

Carnival’s revenues rose from about $17.5 billion in FY’17 (fiscal years end November) to about $21 billion in FY’19, as demand for cruises increased. The company’s earnings also grew over the period, rising from around $3.70  per share to about $4.30 per share. However, the picture changed dramatically over FY’20, as revenues dropped to under $6 billion, with the company losing about $13 per share over the year. Although the company resumed sailing from U.S. ports in July, revenues are still expected to decline further in FY’21 to about $3 billion, per consensus estimates, as the spread of the more infectious delta variant of the virus likely causes some customers to hold back on cruising due to the recent resurgence of U.S. Covid cases.

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

Carnival’s total debt has increased from roughly $9 billion in FY’17 to about $30 billion as of the last quarter, while its total cash increased from about $500 million to over $9 billion over the same period, as the company has raised funding to tide over the crisis.  Although the company’s cash flows from operations grew marginally from $5.3 billion in FY’17  to $5.5 billion in 2019, the company burned over $6 billion in 2020 as operations were suspended through much of the year. Monthly cash burn over the first half of 2021 also stood at about $500 million. Considering this, we think that Carnival’s cash cushion appears to be sufficient to keep the company going over the next several quarters, even if demand remains muted in the interim. However, the company’s higher interest costs could weigh on profitability through the post-Covid recovery period. 

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
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment. Multiple countries have undertaken large-scale vaccine programs for Covid-19, though new variants of coronavirus resulted in an uptick inactive cases.

Overall, we believe that CCL stock is likely to see higher levels going forward. Although FY’21 is also likely to remain a relatively muted year for the company, FY’22 is likely to be better. Although Covid-19 could linger, cruise line companies (and their passengers) will likely adapt to the new normal potentially requiring vaccines for passengers and staff, submissions of a negative coronavirus test, and mask-wearing in indoor spaces. Carnival, along with its major rivals Royal Caribbean and Norwegian Cruise Line, have signaled robust demand for 2022, even factoring in higher prices for cruises. Consensus estimates point to sales of about $18 billion for 2022, almost approaching pre-Covid levels. With CCL stock remaining down by about 55% since late 2019, and demand slated to pick up, the risk to reward prospects for the stock are looking better, in our view.

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