Perhaps no industry was hit harder by the global pandemic than the cruise ship business. Multiple cruise ship operators had to take on heaps of debt to stay afloat, but none of them entered bankruptcy protection, which is remarkable considering the circumstances.
However, with the pandemic in the rear-view mirror, investors have been buzzing over the potential reopening of stocks such as Carnival Corporation. The firm is the largest cruise operator globally, and has miraculously come out of the coronavirus crisis relatively unscathed.
Booking trends are rising at a healthy pace, indicating that recovery is gaining traction. Moreover, the firm expects a return to pre-pandemic occupancy levels by next year. Therefore, there’s a lot to like about CCL stock, especially at current prices.
On TipRanks, CCL scores a 6 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to perform in-line with the broader market.
Light at the End of the Tunnel
Recent updates from CCL suggest that the worst is over, and it’s now looking to kick things into high gear. Revenue is picking up, and it expects to be EBITDA positive later this year. Operating occupancy rates came in at 54% for the first quarter, a substantial increase from the same period last year. On top of that, initial deposits stood at $3.7 billion in February, a $0.2 billion improvement from November. The geopolitical tensions can severely harm booking trends that need to be monitored.
It generated an incredible $1.6 billion in sales, compared with just $26 million from the prior-year period. However, it generated a massive operating loss of $1.49 billion for the quarter. The cruise operator is looking to trim its fleet to pursue an optimization plan to improve efficiency. This could improve profitability, but with its massive debt levels and the resultant finance costs, things aren’t looking too bright in that respect.
Surviving the Debt Load
A lot has been made about the debilitating impact of CCL’s debt load on its long-term outlook. CCL and its peers were compelled to increase their debt burdens to survive the pandemic substantially. The last couple of years has been by far the worst in its history, pushing its top and bottom lines in the red.
After February, its long-term debt was at a whopping $30 billion, compared to $9.6 billion in November 2019. The COVID-19-led disruptions have severely compromised its liquidity positioning. Furthermore, its cash equivalents were at $6.9 billion at the end of the first quarter compared to $9.1 billion in the previous quarter.
The company’s cash burn rate is at a colossal $700 million each quarter, but it has enough funds to survive with zero cash flows for the next several quarters. Hence, the concerns surrounding a potential bankruptcy are largely overblown.
Furthermore, CCL has been one of the most efficient cruise operators globally, having an incredibly diverse geographic footprint. Its operating margins averaged an impressive 16% from 2014 to 2019. Moreover, gross margins were consistently over the 30% mark during the same period.
Given its solid track record in the past, I expect CCL to be the first to recover from the downturn. Its humungous scale enables it to reduce per-unit costs compared to its peers, which is a major advantage. Moreover, the gradual improvement in booking numbers will help CCL strengthen its liquidity position further.
Improvement in ticket prices can be seen for the company, amidst robust booking volume from multiple markets. It also introduced a streaming network and a mobile gaming platform to improve the attractiveness of its product. These efforts could result in a considerable improvement in sales numbers.
Wall Street’s Take
Turning to Wall Street, CCL stock maintains a Hold consensus rating. Out of 10 total analyst ratings, two Buys, five Holds, and three Sell ratings were assigned over the past three months.
The average Carnival Cruise Lines price target is $21.44, implying 59.17% upside potential. Analyst price targets range from a low of $15 per share to a high of $30 per share.
Bottomline on CCL Stock
The cruise line sector took a major blow over the past couple of years due to the pandemic-led restrictions. Consequently, CCL and other cruise operators were forced to close up shop and load up on uncomfortable amounts of debt.
However, the ships can sail again with COVID-19 largely in the rear-view mirror. CCL sees a strong uptick in booking trends, which suggests that it’s gaining plenty of traction. Despite the challenges, the cruise sector could likely grow at a rapid clip over the next decade. We are seeing a rising middle-class in more populous nations with greater work flexibility, creating a healthy increase in demand.
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