With reopening America on the minds of investors and consumers alike, many beaten down stocks are on the mend. One of the biggest names in that regard has been Carnival Cruise (NYSE:CCL). CCL stock has given investors hope, more than doubling from its March low.
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But is there a false sense of security with the stock’s move? After all, the entire stock market hardly seems to notice the fact that 40 million Americans have filed for unemployment in two months. Or that GDP is plunging. The world isn’t ending, but it’s far from flourishing at the moment.
While we’re expecting to see a sharp but short recession due to the novel coronavirus, it’s hard to ignore the facts of what’s going on. For Carnival, it may have very well bottomed. But that doesn’t mean it should be a go-to investment.
Digging Deeper on CCL Stock
Carnival faces a clear disruption to its business line. When the country — and most of the world — went under lockdown, cruise lines, airlines and travel companies took a big hit.
Unlike many retail outlets, be it Amazon (NASDAQ:AMZN) or Target (NYSE:TGT), business did not continue to come through the door. Companies like Delta Air Lines (NYSE:DAL) also saw revenue dry up, but it didn’t completely shut off.
In the case of Carnival, Royal Caribbean (NYSE:RCL) and others, revenue shut down as ships were docked and sailings were cancelled. Customers called in for refunds, while maintenance and ship costs were still being logged. This creates a severe drag on cash and put the companies’ liquidity at stake.
While Delta and other airlines are also experiencing notable cash burn, they have been operating and can get back up and running more quickly. Maybe running at such low capacity is worse for their cash situation — it’s a worthy debate. But arguing about which industry has it less bad is far inferior to researching the industries that are doing the best right now.
Because of this cash burn, CCL stock has had to seek outside funds. It raised $5.75 billion in debt due in 2023 and roughly $500 million in an equity offering. The company has also seen solid demand for its cruises later this year, provided they sail.
Between rising bookings and a big cash infusion, Carnival should avoid a liquidity event and live to fight another day. For investors, that’s all they can ask for at this time and the stock has responded in kind.
Valuing Carnival Stock
This is perhaps the most difficult part of the puzzle: Valuation.
How do you value a company that, almost overnight, had its sales funnel shut off while expenses continue to bleed on? Further, how long will the country remain reopened? Will there be a second wave of Covid-19 or another series of lockdowns?
These types of unknowns translate to discounts in the stock price, which is exactly what we’ve seen in CCL stock. Factor in the additional debt — where long-term debt was at “just” $9.7 billion at the end of last quarter — and it becomes even trickier.
We’ve seen shares trade down to and bounce twice at $8 now. That’s what technicians call a “double bottom.” Given the state of the company and uncertainty at that time vs. where Carnival is now, that may very well be the bottom. So why up at $16, double that prior level, do investors want to buy in now?
In that respect, I want to go with the businesses that are working. I want to invest in companies with strong balance sheets and solid growth this year and next year. Yes these companies command higher valuations, but they justify the premium because of that strong growth.
I’m talking about companies like Twilio (NYSE:TWLO), Microsoft (NASDAQ:MSFT) and PayPal (NASDAQ:PYPL). There might be an opportunity in CCL, but I don’t want to speculate, I want to invest, and I’m doing it with the best of the best.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
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