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Carnival Corporation Faces Another Setback

Carnival Corporation (CCL), the world’s leading cruise service provider, is facing new challenges as the Omicron variant of COVID-19 continues to wreak havoc in many parts of the world. Despite preventive measures in place to prevent the spread of infection, cruise ship itineraries are being delayed due to heightened health risks.

In recent quarters, the company reported positive cash flows and a steady increase in booking volumes even after operating at a reduced capacity. However, according to the Centers for Disease Control and Prevention, cruise ships are now being investigated after new cases reaching record daily highs.

I remain neutral on Carnival stock as the progress made by the company in the last few months is now shadowed by macro-level headwinds.

2022 Will Be Another Challenging Year

According to a list recently issued by the CDC, 86 ships have reported cases of COVID-19, and Carnival owns and operates 32 of the 86 ships being investigated by the CDC. Health authorities have also warned travelers against cruising and said that they are collaborating with cruise lines to establish passenger safety by ensuring shipboard medical resources are not overburdened.

The CDC updated the Travel Health Notice for cruise travel from level 3 to level 4 on December 30, advising all American residents, including those who are fully vaccinated, to avoid cruises.

Cruise ships operating in U.S. waters reported 162 cases of COVID-19 between November 30 and December 14 and 5,013 cases between December 15 and December 29. The number of cases has averaged ~760,000 per day in the United States in the last seven days.

The cruise business was returning to normal before the Omicron variant surfaced just over a month ago. Carnival’s revenue per passenger cruise day (PCD) climbed by over 4% in the fiscal fourth quarter of 2021 ended November 30, and the operating capacity reached 61% by the end of the quarter, suggesting the recovery was accelerating.

However, the fast-spreading Omicron variant has already led to some volatility in bookings, and this could continue for a few more weeks or even months if the global vaccination drive fails to curb the spread of the virus.

There appears to be more work to be done before cruise companies are allowed to resume operating at the maximum capacity, which could also lead to a fresh wave of capital raising among cruise companies. This would only deteriorate the balance sheet strength of these companies, including Carnival.

Carnival Freedom cruise was recently denied entry to Bonaire and Aruba after some passengers contracted the virus, which is a clear indication that the industry is preparing for another round of regulatory battles as well.

Even more challenging would be dealing with the potential cancellation of itineraries, which could discourage travelers from accepting future booking credits from the company, in which case Carnival would be liable to refund money to customers. Such a negative development would severely impact the company’s liquidity position in the next few months.

Besides, even if cruise companies were to continue with fully vaccinated passengers, there are strict rules to follow both before and after boarding the ship, which may discourage people from cruising.

Wall Street’s Take

Turning to Wall Street, CCL stock has a Hold consensus rating, based on one Buy and six Holds assigned in the past three months. The average Carnival price target comes to $25.57, which implies upside of 18.2% from the current market price.

Takeaway

The CDC has advised travelers against boarding cruise ships, and many cruise companies have already reported a decline in booking volumes. Carnival stock, however, has rallied 18.5% in the last 30 days, suggesting that investors are looking at the long-term potential of the company to dominate the cruise industry, which is expected to grow in leaps and bounds once normalcy prevails.

Carnival still expects to reach full capacity before the end of this year, but investors should ideally monitor industry conditions in the next few weeks carefully to determine whether this target can be achieved.

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