Is Carnival Stock a Buy?

With the outbreak of the COVID-19 pandemic earlier this year, the cruise industry faces a historically difficult challenge. As many countries imposed lockdowns and closed borders, cruise lines joined airlines in bringing their fleets to a standstill as cancellations escalated at an alarming rate. Carnival (NYSE: CCL), a major player in the cruise industry with nine different cruise brands, was no exception. The company had to deal with a large number of cancellations and a drop in term bookings as people canceled vacation plans to take refuge in their homes.

Carnival’s recent earnings report demonstrates the financial damage caused by the coronavirus. For the second quarter of 2020, passenger ticket revenue fell 86.3% year over year to just $ 446 million, while total revenue fell 84.7 % year over year to $ 740 million. The company recorded an operating loss of $ 4.2 billion for the quarter, although some of the loss can be attributed to goodwill and other impairments amounting to nearly $ 2 billion.

Carnival’s stock price has plunged 69% year-to-date, although it has nearly doubled from its low of around $ 8 in early April. Could stocks be of great value to the savvy investor?

Image source: Getty Images.

Industry-wide break

It has been a long and painful wait for cruises to restart as the pandemic continues to rage in the United States and around the world. Last week, members of the International Association of Cruise Lines (CLIA) announced a decision to voluntarily extend the hiatus for cruise shipments in the United States until October 31, 2020. That means Carnival has had to cancel all the cruises which were to leave the country in October.

To ensure customers have confidence in the Carnival brand and continue to make new bookings, the company has had to offer customers the option of requesting enhanced cruise credit (FCC) or cash refunds. An enhanced FCC can increase the value of an original booking or provide additional onboard credits.

While issuing an FCC helps build customer loyalty and minimizes dissatisfaction, it could cost the cruise line dearly in the future.

Sufficient liquidity

The company has estimated that its monthly cash utilization rate for the second half of 2020 will be around $ 650 million, with the bulk of it being operating and administrative expenses for current vessels, interest expense. and capital expenditure incurred. Fortunately, Carnival managed to raise more than $ 10 billion through a series of fundraising deals, and it also plans to continue cutting administrative and capital spending on new construction for the remainder of the year.

In addition, the company has $ 8.8 billion in committed export credit facilities to continue funding ship deliveries through 2023. Carnival continues to actively manage its fleet, last month announcing plans to its second Excel LNG-class ship, confirmed for delivery in November 2022. And in June, it announced progress in building a new 5,000-passenger mega cruise ship called Mardi Gras. These new vessels are being prepared for passengers once cruises are re-authorized by the CLIA, demonstrating management’s long-term commitment to fleet renewal.

Several cruise brands restart their operations

There has been some positive news this month, however, as some Carnival cruise brands prepare to resume shipping in September. AIDA Cruises will resume operations from September 6, with the first ships leaving German ports. Costa Cruises plans to restart operations from Italian ports on the same day, following August 11 approval by the Italian government on the resumption of cruises and new health protocols.

However, other brands such as Holland American Line and P&O Cruises continue to wait for clearance to begin operations, with cruises being canceled for the remainder of the year.

A long and uncertain wait

While there is good news among many bad, it is not enough to convince investors that the worst is over. The pandemic situation does not appear to be improving, and even if a vaccine is found, the industry will not return to pre-pandemic levels anytime soon.

While the Carnival brand remains strong and customers have pre-booked trips to sail from 2021, significant uncertainty revolves around the company’s cost structure and expense burden after the pandemic. As it stands, it’s probably best to take a wait-and-see attitude to see how things go.