Why It’s the Wrong Time to Buy Carnival Shares

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Carnival (NYSE:CCL) stock has had a turbulent year. First, it you had the big storm. As the novel coronavirus took hold, CCL stock plummeted from $50 to a low of just $8 at the height of the panic this spring.

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Then you had the false dawn. Things appeared to brighten there for a minute. The economy was reopening and many tourist destinations made a show of getting back to normal. The cruise lines followed suit, and planned to start sailing again by the end of summer. Traders bought in, with Dave Portnoy and his legion of followers taking a particularly liking to the travel stocks.

CCL stock tripled off the lows, reaching $25 for a brief shining moment in June.

Now, however, the reality of the economic mess is setting in. It’s becoming clear that there will be no quick return to normal. Almost every day, we hear about new limits and shutdowns again. While there are promising signs on the horizon, such as potential virus vaccines, there isn’t anything that will turn the tide in the near-term.

As such, the cruise lines are having to scuttle their plans. With revenue drying up, the travel stocks are in free-fall again. Carnival has already dropped 40% from its June high, as shares have slumped back to just $13 now.

CCL Stock to Suffer From Cruise Delays

Marketwatch recently reported that Carnival is delaying the return on a large number of its cruises until Dec. 15. That’s in stark contrast to earlier hopes that they could get going again in August.

You might think that cruise departures only have to be shut down through September, which is the U.S. government’s current timeline. However, other major countries like the United Kingdom and Canada are putting in place strict restrictions on cruises leaving from their ports.

Meanwhile, many tourist destinations are refusing to accept cruise ship vessels for the time being to slow the spread of Covid-19.

Against this patchwork of confusing and frequently-changing regulatory restrictions, operators like Carnival are finding it more simple to shut things down. And that makes sense. With the virus continuing to spread quickly in the United States and show out-of-control case counts in emerging markets such as Mexico, Brazil, and India, it’s hard to justify reopening an industry like cruises just yet.

Wasting Asset Value

For the quarter ending in May, Carnival burned $2.7 billion in cash running its business. That’s $900 million per month. Reportedly, it can cut these losses to closer to $600 million per month going forward. Still, we’re talking about the company blowing through nearly $2 billion a quarter while it waits for the virus to recede.

Carnival has a market capitalization of $11 billion. Thus, it’s burning through roughly 5% of the equity’s remaining value with each and every month that passes. With mass-market cruising now delayed to December at the earliest, you’re looking at a huge chunk of Carnival’s value disappearing before it can even start to sail again.

Once it does, don’t count on anything like pre-Covid levels of profitability returning soon either. Operating costs will be higher with all the safety measures required in the new landscape. Meanwhile, customers will likely need discounts to motivate them to get on ships again, both due to the perceived health risks and also people’s strained finances thanks to the recession.

CCL Stock Verdict

Sometimes there’s a lot of nuance to market sentiment. Sure, the news may be bad now, but people may be overreacting, or something like that. In June, investors bid up CCL stock on the hopes that the market had gotten too negative. But in fact, Carnival’s plunge was perfectly rational once you look at the company’s financials, and it’s no surprise that the stock is tanking again now.

Things here are pretty simple. Carnival doesn’t have the luxury of the time. It just took on tons more debt at high interest rates to survive the Covid-19 crisis. The thinking was that it could handle this debt load as it started sailing again. Now, however, the date for business getting going again keeps on slipping.

It’s increasingly looking like normal cruising won’t resume at any meaningful volume until 2021. And that’s a crushing blow for the cruise line industry, which had previously hoped to start voyages up again by the end of summer.

With Carnival’s balance sheet taking on water, there’s no need to be a hero right now. Expect shares to trade lower until there’s more clarity about when the cruise liners can actually start sailing again.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.

The post Why It’s the Wrong Time to Buy Carnival Shares appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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