Most investors know how badly Carnival Corporation’s (NYSE:CCL) the management team and shareholders expect a return to normal. In fact, the incredible negative movement in CCL shares from more than $ 50 per share before the pandemic to less than $ 8 a year ago cites concerns that the market previously had that this company would remain afloat in these turbulent times.
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Today, stocks have rebounded well to the $ 26 level recently. That said, unlike many economically sensitive sectors, the actions of cruise operators like Carnival are still far from their pre-pandemic levels.
It seems that there is cautious optimism CCL’s shares may recover well with some kind of return to normal. We are all looking forward to a vacation.
Being quarantined and having travel blocks and bans imposed last year will do just that. In fact, a cruise certainly looks good now to many readers. Obviously, the timing and specifications of how the signaling cruise industry might reopen remain uncertain.
That’s why I think there is significant room for optimism now.
Carinval’s size and gap help CCL’s inventory
As in any struggling industry, investors tend to gravitate towards companies with a sufficient safety margin to survive the economic storms that arise from time to time. The covid-19 pandemic turned out to be yet another hurricane for this sector.
That said, the size of Carnaval makes it the most attractive option for long-term investors at the moment. In 2019, Carnival’s market share in the global cruise industry was dominant. The company controlled 47% of the total volume of passengers and almost 40% of the total revenue of the sector. That’s impressive.
If the sector is able to return to some level of normality, there is a strong argument that these shares are currently undervalued. Of course, the bearish sentiment continues to weigh on this stock, and will likely continue for some time. Here are some key issues that Carnival is likely to face in the short to medium term.
Debt will put pressure on earnings
As a result of trying to stay afloat with nothing at all in terms of government assistance, Carnival raised a ton of debt and made several equity issues last year.
In fact, the company’s debt burden more than doubled in the past year. Consequently, from now until 2024, the company has approximately $ 12 billion in principal repayments due on its bonds.
Given the company’s efforts to stay afloat, this was expected. However, some investors are concerned about the burden that this debt load will have on earnings growth in the future.
Here is the good news. After being forced to offer 12% yield bonds immediately after the start of the pandemic, Carnival’s bond yields on recent issues have almost halved. Last November, the company managed to raise US $ 2 billion with a 7.6% yield, without using the company’s ships as collateral.
These 2026 unsecured bonds are much more favorable for the company. This also allows Carnival to have more room for maneuver in the next five years to solve its problems. More importantly, these bonds also push Carnival’s short-term obligations further.
Although Treasury yields have soared in recent months, the corporate bond market has been much more favorable to Carnival these days. In that sense, I think the market is starting to breathe life into this sector.
This is good news for investors in CCL shares, especially since the government apparently does not want to intervene to help. As in the case of the auto industry after the Great Recession and the post-9/11 airline industry, these industries will find a way to survive and long-term investors will see a return over time.
At least, that’s what the bond market is pricing now.
Conclusion
Dilution and deterioration of the balance sheet are the main concerns of investors. There are reasons to believe that the growth in Carnival’s long-term gains was structurally hampered by this pandemic. The pessimists in action have a reason to be, and I will not tamper with it – the carnival will be busy for a while.
However, I think there is reason to be optimistic about this action now. Mass vaccinations in the United States and abroad are likely to provide much more favorable conditions in the medium term.
In the long run, I think the company’s position in the market is the key to this action. Carnival remains the golden child of the cruise industry. Consequently, this action is at the top of my watch list now.
As of the date of publication, Chris MacDonald did not (directly or indirectly) hold any positions in the securities mentioned in this article.