Carnival’s (NYSE: CCL) fiscal second-quarter earnings fell short of investor expectations by a wide margin. Analysts, on average, were expecting a net loss of $1.76 per share on $737.8 million of revenue. On June 18, Carnival reported a net loss of $3.30 per share on $700 million of revenue. Since the announcement CCL stock has shed more than 20% of its value.
Carnival’s outlook has gotten more complex since my last article on CCL stock, as the company agreed to postpone its cruises until Sept. 15, in-line with the rest of the industry. Additionally, it plans to sideline at least six of its ships in the next three months and may place more of its ships in storage in the near future.
Carnival’s CEO, Arnold Donald, recently discussed the uncertainty surrounding the cruise line industry, “I wish I could give you a date, but we can’t, because it’s a regulatory matter. I learned a long time ago not to try to forecast regulatory dates,” Donald said.
Therefore, given the massive uncertainty surrounding the cruise industry, investing in cruise stocks is purely speculative at this point,. As Carnival’s CEO correctly pointed out, it’s difficult to forecast the actions of regulators, considering the uncertainty of the pandemic. To better understand Carnival’s outlook, let’s look at its situation more closely.
Inexplicable Suspension
Carnival originally was planning to return to the seas by August 1. But later, following the guidelines of the Cruise Lines International Association, it agreed to suspend sailing until Sept. 15. Strangely, Carnival took that action even though the CDC only suspended cruises until July 24, although the agency may extend the shutdown.
On the flip side, the airline industry has taken a more pro-active approach towards tackling the crisis. Some airlines are already discussing increasing their capacity to 50% of 2019 levels.
Now many customers may cancel the cruises they booked with Carnival and its peers. Carnival is holding $2.9 billion of customers’ deposits. If it has to return those funds, its financial flexibility could be materially impacted.
Substantial Cash Burn
With Carnival unlikely to generate any revenue until Sept. 15 at the earliest, Carnival faces an uphill challenge when it comes to controlling its massive cash burn. The company’s Q2 report showed that it was burning roughly $650 million per month. Its decision to suspend its cruises until Sept. 15 could increase its cash burn by $975 million, excluding deposit refund requests that the suspension could trigger.
The company should lose more than$2 billion from the end of Q2 to September 15. That will materially impact its financial flexibility, which continues to take huge hits due to its lack of revenue.
The Future of Carnival
There is a lot of uncertainty surrounding the outlook of the company in particular and the cruise line industry in general. The CDC could decide to extend its no-sail order beyond Sept. 15. A second wave of Covid 19 cases could make the situation even tougher for Carnival and its peers.
It is imperative for Carnival to control its cash burn and focus on managing its finances. It had $7.6 billion of liquidity as of the end of its Q2. Additionally, it aims to obtain more cash by tapping $8.8 billion of committed export credit facilities and debt. Assuming a cash burn of $650 million each month, its total cash burn for the rest of the year will come in at $4.55 billion. Therefore, it appears to have enough liquidity to survive the year without generating any revenue.
The Bottom Line on CCL Stock
Investing in Carnival is purely speculative at this stage. It will be interesting to see how the industry does after Sept. 15 and how many cruise companies are able to stay solvent. At this time, though, there is immense uncertainty surrounding the industry which makes it uninvestable.
As of this writing, Muslim Farooque did not hold a position in any one of the aforementioned securities.