Carnival Corporation (NYSE:CCL) has seen its shares rally on a year-to-date basis, with prices increasing by almost 100%. Yet, beneath the glittering façade of exotic locales and sun-soaked decks, the financial storm clouds are gathering. Indeed, thanks to the impact of COVID-19, management had to resort to value-destroying techniques in order to simply survive. As a result, the company is not well-positioned for a potential economic downturn due to its crushing debt load and cash burn.
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Downward Revision of Earnings and Surging Share Count
Over the past 90 days, a discerning eye would have noticed an alarming trend: the company’s earnings per share (EPS) estimates for the fiscal year 2023 have undergone a significant downward revision, dropping from -$0.08 to -$0.28. This degradation in financial prospects, however, is only one facet of the company’s evolving narrative.
In a worrying turn of events, Carnival’s shares outstanding have ballooned dramatically since 2019, catapulting from 690 million to 1.26 billion. For investors, this dilution of shares presents an uncomfortable reality – a shrinking slice of the company’s profits.
In addition, Carnival’s balance sheet has been exhibiting an unsettling trend. With each passing quarter, the company is incinerating hundreds of millions in free cash flow. As a result, Carnival remains marooned in a sea of unprofitability, its ship seemingly adrift with no land in sight. Even if the company returns to pre-pandemic profitability, the per-share figures would be lower than they would have been due to the dilution. As a result, even with the same profitability on an absolute basis and valuation multiple, the share dilution would equate to a lower share price.
CCL Stock Would be Heavily Impacted by a Recession
As we peer into the murky waters of a potential economic downturn, these concerns take on a new weight. Recessions inevitably lead to a contraction in consumer spending, which in turn significantly impacts discretionary and luxury purchases such as cruises. In such an environment, companies like Carnival Corporation are often among the hardest hit.
The current state of the yield curve only amplifies these recessionary fears. With the 3-month yield hovering at 5.23% and the 10-year yield at around 3.82%, we’re witnessing an inversion – a phenomenon often viewed as a harbinger of recession. The impact on Carnival and other luxury-focused businesses could be substantial.
Perhaps the most alarming issue for Carnival heading into a recession would be its monumental debt load. Standing at an astonishing $36.5 billion, this debt, when compared to the company’s highest EBITDA number in the past 10 years of $5.457 billion, results in a debt-to-EBITDA ratio of approximately 6.7x. This metric flags Carnival as a substantially leveraged company.
The alarm bells ring even louder when you factor in the company’s capital expenditures. With a business model heavily reliant on capital outlays, Carnival’s financial ship is taking on more water than it can feasibly bailout.
Is CCL Stock a Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on CCL stock based on nine Buys, two Holds, and two Sells assigned in the past three months, as indicated by the graphic below. Nevertheless, the average price target of $13.67 per share implies 13.48% downside potential.
Final Thoughts: Investors Should Approach CCL Stock with Caution
When it comes to CCL stock, the question investors must grapple with is whether the risks associated with Carnival Corporation justify potential rewards. Given the company’s ongoing struggles and the specter of an economic downturn looming on the horizon, it might be in investors’ best interests to steer clear of this particular voyage.
