I am losing money with my investment in Carnival Corporation & Plc. (CCL). As you can find here, I suggested investing in the business when the stock was trading around $ 27. With an average cost of over $ 27, I am now sitting on a loss of 25%. Even though I never expected COVID-19 to get out of hand the way it has, I was ready to embrace any loss resulting from my lack of knowledge of the life sciences. Loss paper, however, is something that could be a hallmark of my portfolio for some time that I have no plans to sell the few Carnival stocks I own, at least not yet. As far as I can see, an investment decision, in Carnival, or any other of the operator’s cruise line for the matter, should be based on a company’s ability to remain solvent until its ships are allowed to return to the seas. In this article, you will find what Carnival CEO Arnold Donald said in an interview with Guy’s Points on June 16, an analysis of the company’s position liquidity, and the reasons for my decision to continue believe in the Carnival of the future.
The word that best describes the future of Carnival is “uncertain”
The remarks made by CEO Donald yesterday (June 16) highlight the dire situation the company is currently facing. When asked how long it would take for Carnival to return to the seas, he said:
I wish I could give you a date, but we can’t, because it’s a regulatory issue. I learned a long time ago not to try to predict the regulation of dates.
A plan, however, is being made. This is one of the two positive things I could find in the CEO’s comments. Despite the uncertainty, one thing is very clear: cruise lines, requested by the CDC to maintain the social distance from the rules for a while as the world fights to eradicate the threat. As revealed on June 16, the Carnival is to think about taking on board changes such as the doubling of the movie shows per night from two to four, and not to allow passengers to touch the serving utensils in the buffets, regular analysis of the temperature of the passengers on board, and asking the elderly cruise enthusiasts to present a medical certificate of compensation as brought on board.
The second and most important positive I see is that the Carnival is not planning to hand in on big discounts in the coming months in order to attract customers. To tilt the balance in favor of demand, the Carnival plans to limit the number of ships in the supply. As a result, the Carnival CEO believes that the trafficking would be no better than what we are witnessing today. In response to a question from the moderator, Arnold Donald said:
I would not count on a large number of transactions. When we start sailing again, more than likely, because there are going to be fewer ships, and people are worried about cruising, there will be more demand than supply first.
I see this as a positive attitude as the Carnival of the target market mainly includes high-net-worth individuals. Carnival has to work to find a balance between, attracting cruise passengers and loading them enough to generate operating cash flow.
For 2021, cruise bookings increased 9% in March compared to last year, which is likely the job of pent-up demand. It’s just a little piece of good news in the sea of bad news that has steadily flown in the past few months, but my decision to stay invested is mainly based on the company’s liquidity position, and the expectation that Carnival will be sailing in 2021.
The company can survive until the end of the year
The future is uncertain and there is no doubt that. Assessing whether Carnival can remain solvent has suddenly become much easier than projecting income growth rates for the years to come.
Below is how much worst-case Carnival it would take to survive 2020, with zero turnover.
|The cost of operating vessels||$ 2.4 billion ($ 300 million per month for 8 months, starting May 1)|
|Debt repayments||$ 2 billion|
|Interest payments||$ 500 million|
|Refunds||$ 3.29 billion (assuming 70% of reservations will need to be refunded of $ 4.7 billion of total reservations)|
|Total engraving cash in 2020||$ 8.2 billion|
|Total amount of cash from May 1||$ 9.75 billion|
Source: Company records
On top of that, you have to take into account other operating and administrative expenses that can run into a few million dollars in a month. The 70% cancellation rate I used above is pretty aggressive given that 45% of customers contacted by Carnival in the two weeks ending March 15 had decided to accept the future cruise credits in lieu of reimbursement.
With these figures in mind, I see the Carnival surviving until the end of the year with no collateral damage. UBS analyst Robin Farley accepts and writes in April:
CCL’s capital increase last week gives it the longest run of liquidity in order to stay afloat in a zero-income scenario, at around 12-13 months, with potential for another 2 months, depending extended layups, and much more (which we detail below.) Which puts CCL at the front of the crosswalk, which we think has ~ 10 months of liquidity in a zero-rev scenario, and NCLH which, we think, has ~ 7-8 months of liquidity in such a scenario.
At the same time, however, I do not intend to play the company’s recent debt issuance, which is very expensive. But if ever he came down to choose bankruptcy or high cost debt collection to keep the business intact, I would be happy to choose the latter.
The CDC may need to extend the veil so
Carnival originally scheduled to resume operations from August that no control sail for cruise ships is set to expire on July 24. However, when the CDC came with this order in mid-April, we did not know that the United States should be exposed to the risk of a second wave of infections. Norwegian Cruise Line Holdings (NCLH) yesterday announced an extension to cruise suspensions until September 30, in light of recent developments. It would not have come as a surprise if other players in the industry, including Carnival, will follow suit in the weeks to come. This will not bode well with investors and there is a risk that stocks will plummet in their mid-teens before they even think about recovery.
Why Carnival when there are safer bets to play the expected recovery?
To begin with, I do not recommend loading the travel and leisure portfolio from the inventory sector to an extent if the risk of a second wave of infections materializes, the value of the portfolio would be in free fall. Rather, it should be a tactic of the award decision. I do not own all the airlines or any other of the cruise line other operators than Carnival, which represents less than 3% of my portfolio. For me, it’s a question of finding a good balance between risk and reward. Even though Carnival is a very risky bet, the potential for returns is significant as the stock could easily triple the current price to reach mid-2018 levels, even if reservations, income and earnings take much more time to recover from pre-coronavirus levels. This has a lot to do with market sentiment and the forward-looking nature of the stock markets. By giving a little exposure in my wallet for Carnival, I expect to gain some oversizing back, hopefully, of course.
I chose Carnival over my peers because of its leadership position in the cruise industry. The company accounts for around 50% of total cruise passengers, and my thinking is Carnival would be one of the first companies to return to normalcy whenever it could be.
Take away food
My long position in Carnival could probably be the riskiest stock I have exposure to. A lot could go wrong, but an analysis of expert comments on the pandemic led me to believe that the situation would be under control by the beginning of 2021. The carnival can certainly survive until then, and the stock is likely surge in a global post-pandemic. Unlike some investors who are in it to make a few dollars, I am in the long run as I find the risk-return profile attractive. The return on investment is likely to be found at both ends of the spectrum, which means the stock will either triple its prices to converge to pre-coronavirus levels or the company will cease to exist when that is all the more. Investors who recognize this fact and are comfortable with the high degree of risk involved in Carnival can find the stock to be an attractive investment when the stock falls into mid-teens, again, which may not be long given bad news about a stretch without veil the order is pending.
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Disclosure: I am / we are long from the CCL. I wrote this article myself, and it expresses my own opinions. I don’t get compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.