The Worst Mistake Carnival Stock Investors Can Make Right Now

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It is terribly tempting to nibble on cruise line stocks these days. Industry leader Carnival (NYSE: CCL) (NYSE: CUK) trades 72% less in 2020 and its smaller competitors Norwegian Cruise Line Holdings (NASDAQ: NCLH) and Royal Caribbean Group (NYSE: RCL) are also among the biggest losers this year.

With so many market darlings trading significantly higher and the market now firmly in positive territory, there will be bottom feed among cruise line stocks. It could be a big mistake. A fatal flaw in chasing a declining stock is to assume that the cap is suddenly higher. Carnival’s stock may triple from here and still not be where it was when the year started. That’s the benefit only if the cruise line operator can get back to where it was at the end of 2019. Unfortunately for Carnival and its speculators, it won’t be back in shape anytime soon.

Image source: Getty Images.

Veil of fire

The current fate of the industry is quite entrenched. All of the major cruise lines have canceled their cruises to the United States as well as most of their international crossings at least in early November. About half of the passengers on the suspended crossings requested reimbursement. The other half agreed to accept a soft credit on future crossings. We are eyeing a cash crunch even once Carnival and its peers return to the open waters.

The good news is that Carnival has raised over $ 10 billion through a series of fundraising deals. Couple that with the reduction of billions of dollars in operating costs and capital spending after reducing its fleet by losing assets and postponing deliveries of new ships and Carnival will survive. A month ago, he said he had enough cash to hold on for another full year, and he continued to make fundraising moves.

Bad news from an investment perspective is also all that has been mentioned as good news before. The price of additional liquidity is that more debt translates into more interest charges, which means lower profits. More shares issued as part of fundraising efforts reduce earnings per share. Even if Carnival’s fleet was at full power, it wouldn’t land near last year’s profit peak.

A few weeks ago, Deutsche Bank analyst Chris Woronka offered a glimpse into Carnival’s diluted and expense-laden future. Between the $ 850 million in additional interest charges the cruise line will face by 2023 and the larger number of shares, the $ 4.40 per share reported in earnings last year would only be that of 2.88 dollars.

In reality, the future could be even less profitable. Demand is not going to rebound anytime soon, even if an effective vaccine is licensed. A lingering recession will keep prices in check, even with fewer ships in Carnival’s portfolio.

Things don’t have to end badly for Carnival. The economy could rebound quickly, and consumer sentiment about the safety of cruising could be repaired sooner rather than later. However, it’s not reasonable to assume that Carnival simply needs to get back to where it was when it was in great shape last year for the stock to return to its old highs. The cap is not as high as many investors think, and overestimating the short-term gains here is the worst mistake Carnival stock investors can make.



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