Stock Analysis & Ideas

Carnival Corporation: Why We’re Staying on the Sidelines for Now

Story Highlights

Carnival’s top-line growth is encouraging. However, its growing debt level continues to haunt potential and current shareholders. The company generated positive growth post-COVID, but its vulnerability to macroeconomic uncertainty has scared investors with a short-term mindset.

CCL is down 52% year-to-date, which isn’t the post-COVID-19 bull run people were expecting. Undoubtedly, the revival of cruising has resulted in a pull-back in sales, but it could take years for Carnival to curb its debt load.

However, the high amount of debt doesn’t snatch away Carnival’s attractiveness. We believe CCL likely remains a Buy in the long run, but its near-term troubles have us staying on the sidelines for now.

It is unlikely that Carnival stock will shoot upward anytime soon because of near-term headwinds. However, CCL holds the long-term potential to grow, so it isn’t a stock you’d want to keep out of your radar.

A So-So Restart

The cruise line sector took a massive beating due to the pandemic-induced headwinds. Fortunately, restrictions have been largely removed, and cruise companies are generating revenues again.

Carnival’s first quarter’s sales jumped from $26 million to more than $1.6 billion year-over-year. This represents a whopping ~6200% bump in sales, which is relieving for investors. However, the revenue figures are far below the $4.67 billion generated in 2019’s first quarter.

Carnival’s top-line growth has been encouraging for investors, but its bottom line is a concern. Despite the gush in revenues, the company’s operating losses were reduced by a mere 2%, falling to $1.49 billion.

The results were attributable to high fuel costs and salaries that have risen due to inflationary pressures. However, the company aims to address the issues by replacing inefficient ships with large ones. Management also plans to transition to liquefied natural gas, which could reduce fuel costs by 10%.

Mounting Debt Load

Higher economic uncertainty and high operating costs pose challenges for Carnival, but there’s a bigger problem. The high cost of interest on the debt could be the most significant risk for Carnival. Recently Morgan Stanley (MS) analyst Jamie Rollo warned investors about Carnival’s high cost of debt and slashed his price target on the stock by 23.5%.

Furthermore, the analyst enlightened investors by mentioning that the company might issue more additional shares to service its debt, which would result in shareholder dilution. However, it seems like a far-fetched notion since Carnival’s revenue has started picking up again.

Carnival’s debt amounts to almost $35 billion, exceeding the company’s $6.9 billion cash and cash equivalents. Current conditions imply that until operations take a drastic turn, Carnival can’t solve the issue.

Recently in May, Carnival borrowed $1 billion to pay off former debts. However, this decision is quite expensive since the debt comes at an interest rate of 10.5%.

The Road Ahead

Carnival continues to face fundamental issues. Given Carnival’s bottom line and debt position, the rest of 2022 might be challenging. Currently, CCL’s EPS stands at -$2.48, which should remain negative for the remainder of the year.

Moreover, Carnival posted an earnings miss in its quarterly reports, making it hard for investors to be bullish on the stock. However, it isn’t all scary when it comes to Carnival. The good news is that the company is expected to have a positive EPS of $1.46 by Fiscal 2023.

Wall Street’s Take

Turning to Wall Street, CCL stock maintains a Hold consensus rating. Out of 12 total analyst ratings, two Buys, six Holds, and four Sell ratings were assigned over the past three months.

The average Carnival Cruise Lines price target is $19.15, implying 99.5% upside potential. Analyst price targets range from a low of $7.70 per share to a high of $30 per share.

Bottom Line – Is CCL Worth Considering?

Carnival requires massive growth to fight the desperate straits of its balance sheet. Despite operating in one of the most-affected industries by COVID-19, cruise companies got no assistance from the government. As a result, the companies had to rely on low-interest rates to attain huge debts to help pull them through the predicament. Unfortunately, this decision has come back to bite them.

Currently, it isn’t all glamorous for Carnival. However, the company’s management is optimistic that this summer will bring more positives. If this happens, the cruise behemoth will be able to control its debt without raising additional shares.

No doubt, Carnival is dealing with multiple external issues that are affecting the company’s fundamentals. Some of the top growth stocks have taken a beating during the current downturn. The cruise sector had already been struggling with its demons, but the macroeconomic challenges have only exasperated its troubles. Hence, at least for the interim, CCL stock remains unattractive.

However, Carnival’s future outlook looks encouraging with a healthy backlog and pent-up demand. It might not be wise to invest in CCL right now, but its long-term story looks enticing.


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