In theory, this should be a smart time to buy the largest cruise operator in the world. It is a fair bet that Carnival (NYSE: CCL)(NYSE: CUK) and their smaller peers will start sailing again sometime this year. We are in the early stages of the vaccination process, which should ideally put an end to the pandemic that basically ended the cruise industry.
Prioritizing seniors to access COVID-19 vaccines is great news for an industry where retirees are a profitable target audience during off-peak periods of the cruise season. Last week’s carnival, Royal Caribbean (NYSE: RCL)and Norwegian Cruise Line Holdings (NYSE: NCLH) all postponed the return to sailing from April to May. We may finally be reaching the point where the beams are planted in cement. Is the worst over for carnival? The shares are being traded 72% below their historic maximum established three years ago, but there is more to this story than meets the eye.
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Rocking the boat
There are many things that Carnival did well during the lull, since the last of its revenue-generating cruises ended more than 10 months ago. Carnival has optimized its fleet by unloading its less efficient ships. Last week, it announced that it was selling the Pacific Princess, one of its smaller boutique ships. Carnival has also reduced its expenses to the point that its monthly cash consumption rate is $ 530 million per month.
Carnival has increased its liquidity to stay afloat next year if disturbances continue, but this movement for survival comes at a cost. The bloated stock count and the expansion of long-term debt kept the corporate value of the stock high, even when it sank. Carnival ended fiscal 2019 at the end of November of that year with its shares at $ 45.08 and a company value of $ 41.7 billion. A lot has happened in the 14 months since then, and most of the news has been negative. However, despite shares starting the new trading week at less than half of where they were at the end of fiscal 2019, the company’s value is roughly the same at $ 39.7 billion.
In other words, the market believes that carnival is worth almost as much as before the pandemic, even though the individual investors who owned the shares have lost more than half of their value since the end of fiscal 2019. Bulls expecting the shares Upon returning to recent highs, I did not realize that the value of Carnival as a company is already at pre-pandemic levels. They were simply stuck in what is essentially a 2-for-1 stock split without receiving additional shares.
The worst apparently ended in terms of fundamentals. Revenue growth will be positive when Carnival returns to sailing, as we will have overcome the interruption of mid-March last year. Analysts see Carnival losing half the money – per share – this year than in 2020, but many variables are embedded in this consensus forecast.
The future is bright. It can even be argued that Carnival will be even better in the future. It will have fewer ships, and the moorings that the pent-up demand does not claim are probably already secured with reservations already made by guests who apply canceled cruise credits on future trips. As the biggest actor in the industry, Carnival is also well prepared to survive the inevitable upheaval.
The bullish argument for stock recovery is more nuanced. Carnival is not a worthwhile action just because it fell dramatically last year. It has basically the same business value as a year ago, even though it is reaching less than half the price. Carnival fundamentals will start to improve in a few months, but it will take more than that for the carnival stock to keep up with the race.