Carnival Still Has Lots of Leaks to Plug
It was just last month that some of the names most adversely affected by the novel coronavirus outbreak, including Carnival (NYSE:CCL), rallied, but those rebounds are proving to be short-lived as CCL stock is coming back to earth.
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On the back of a 5.3% decline over the past week – one that exceeds that of the S&P 500 over the same span – Carnival is just breaking even over the last month. Amid mounting concerns about the health of the global economy and how dramatically altered the cruise industry is by Covid-19, Carnival and its peers could be facing near-term downside.
Admittedly, I said the same of Carnival earlier this month and, initially, it looked liked as though I was wrong. With little in the way of positive economic data, namely those of the consumer and employment varieties, coming anytime soon, a near-term bearish thesis on travel and leisure is probably justified and potentially rewarding.
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Think about CCL stock, and any other cruise stock for that matter, through this lens. In a post-virus world, if folks are leery of getting onto an airplane or trotting into a casino for fear of contracting a second wave of coronavirus or another illness, common sense dictates the same sentiment is applicable to cruise ships. As one of my InvestorPlace colleagues so eloquently put it, cruise ships have documented reputations for being floating Petri dishes.
It’ll Survive, But Thriving Is a Different Matter
Over the near- to medium-term, Carnival is a dichotomy. It appears unlikely the company will go belly up, even though it can tap the CARES Act for funding. But on the other side of the coin, it’s one of the most challenged names in its industry.
“Let’s try and keep this simple. Do we think CCL is a bankruptcy candidate? No,” said Stifel analyst Steven Wieczynski in a recent note. “Do we think as we look across the cruise universe that CCL has the toughest road ahead? Yes, for sure, and it’s going to be a long recovery given not only do we believe the broader cruise industry’s reputation is damaged in the near-term but certain brands under the CCL umbrella could be impaired for a significant time period.”
In non-analyst speak, what’s happening with Carnival and Norwegian Cruise Line (NYSE:NCLH) and Royal Caribbean Cruises (NYSE:RCL), for that matter, is that it’s likely ships stay docked until late in the third quarter, if not into the fourth quarter. That means there’s at least one, if not two, quarters of essentially no revenue ahead.
That’s a segue into another important point. Investors waiting on the cruise business to look like it did in 2019 will be waiting awhile … perhaps into 2023.
“What levels of cruise capacity will be needed as the industry starts to recover is really an unknown at this point,” writes Wieczynski. “What we do think is clear though is that capacity levels that were witnessed in 2019 most likely won’t be seen again until 2023 at the earliest.”
The Bottom Line on CCL Stock
Another point to consider with CCL stock is a growing debt burden. The company recently sold $4 billion worth of bonds at an interest rate of 11.5%. When a company has to go to such a dark place in the debt market, it’s a sign creditors are saying right off the bat default risk is at least above average.
That at a time when markets are telling investors there’s no margin for error for companies with flimsy balance sheets, particularly in economically sensitive industries.
Then there’s the matter of time. As Wieczynski noted above, it could be 2023 before the cruise industry looks something like it did in 2019. However, it could be 2024 before 2019 capacity levels and pricing power return.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
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