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Carnival: 3rd-Quarter Results Show Troubled Waters Ahead

GuruFocus.com
·5 mins read

- By Margaret Moran

Before the market opened on Oct. 6, international cruise line operator Carnival Corp. (NYSE:CCL) announced the preliminary earnings results for its third quarter of fiscal 2020, which ended on Aug. 31.

The company reported a GAAP net loss of $2.858 billion for the quarter, down significantly from net income of $1.819 billion in the prior-year quarter but an improvement from the net loss of $4.274 billion in the second quarter of 2020. As shown in the chart below, the company has never before experienced such a huge drop in profits.


Carnival: 3rd-Quarter Results Show Troubled Waters Ahead
Carnival: 3rd-Quarter Results Show Troubled Waters Ahead

Overview of the quarter

Carnival has not yet filed its quarterly results with the Securities and Exchange Commission, so we will have to wait for its 10-Q before we can see the full earnings results. However, the company's earnings summary provides useful insights ahead of the official earnings release.

The GAAP net loss stood at $2.858 billion for the quarter compared to an adjusted net loss of $1.699 billion. The huge discrepancy here came largely from impairment charges; during the quarter, Carnival recorded $937 million in losses on net ship sales and impairments, as well as an additional $220 million mostly attributed to assorted pandemic-related expenses.

With 882.6 million shares outstanding, the net loss translates to $3.23 per share on a GAAP basis and $1.92 on an adjusted basis. Analysts surveyed by Yahoo Finance have produced an average estimate for adjusted loss per share of $2.20. In the same quarter of 2019, the company brought in adjusted earnings per share of $2.63.

The lower-than-expected loss per share is largely due to the increased share count as Carnival has issued additional shares as part of its effort to increase liquidity and avoid bankruptcy amid high levels of cash burn. This time last year, the company had only 691.0 million shares outstanding, compared to $721.0 million at the end of the second quarter and 882.6 million at present.

Carnival: 3rd-Quarter Results Show Troubled Waters Ahead
Carnival: 3rd-Quarter Results Show Troubled Waters Ahead

The company was already operating with extremely high leverage before the Covid-19 crisis. Since the no-sail order in March, the company has taken the following steps to ensure it has enough liquidity to continue operating:

  • Borrowed $2.8 billion in two tranches under a first priority senior secured term loan facility.

  • Issued $1.3 billion of second priority senior secured notes in two tranches.

  • Entered into Debt Holiday amendments, thus deferring certain principal repayments otherwise due through March 2021.

  • Sold an additional 99 million shares of its common stock and used the proceeds to repurchase $886 million of its 5.75% Convertible Senior Notes due 2023.

  • Issued $900 million of second priority senior secured notes.



Outlook

Costa has successfully restarted guest cruise operations in Italy as of Sept. 6 and expects to gradually resume operations across Europe in the months ahead. Carnival also plans to resume AIDA cruise operations in the Canary Islands and the western Mediterranean in the fall of 2020.

In the U.S., the CDC's no-sail order on cruise lines ended on Sept. 30, though cruise lines have voluntarily extended the no-sail period through at least the end of October (likely due to insufficient passenger demand compared to the cost of running the ships). Currently, customers can book Carnival cruises with departure dates beginning in December.

Of course, ships will be sailing with increased safety protocols to prevent the spread of Covid-19 as much as possible. Passengers will be tested for the virus before boarding, and there will also be temperature checks. Ships will operate with reduced capacity, while group activities will need to be booked ahead of time to limit the number of participants.

"Costa is the first cruise company to earn the Biosafety Trust Certification from RINA," the company wrote in its preliminary earnings report. "The certification process examined all aspects of life onboard and ashore and assessed the compliance of the system with procedures aimed at the prevention and control of infections. Costa's comprehensive set of measures and procedures implemented on Costa Deliziosa cover key areas such as crew health and safety, the booking process, guest activities, entertainment and dining, and medical care on board, as well as pre-boarding, embarkation and disembarkation operations, which includes testing for all guests prior to embarkation."

The company will moderate a phased re-entry of its ships to service. A total of 18 of its less efficient ships have either left the fleet already or will leave the fleet soon, representing 12% of pre-pause capacity. At least one of its ships, the Carnival Fantasy, has made its way to a scrapyard in Turkey. In addition to the ships being retired, the company plans to delay deliveries of new ships.

Valuation

On Oct. 7, shares of Carnival traded around $15.99 apiece for a market cap of $14.11 billion. According to the GuruFocus Value chart, the stock is a possible value trap; while it is certainly trading cheaply compared to estimates of future earnings, the risk of bankruptcy or of unfavorable debt conditions having an outsized impact on results should not be ignored. In the long term, if the company can remain solvent, it could be a profitable investment for those with a longer time horizon who can stomach the risk.

Carnival: 3rd-Quarter Results Show Troubled Waters Ahead
Carnival: 3rd-Quarter Results Show Troubled Waters Ahead

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.