It Will Be a Long, Long Time Before Carnival Stock Is Worth Owning Again

Carnival Corp. (NYSE:CCL) is making intelligent moves in response to novel coronavirus pandemic. The company is selling ships, cutting costs, and streamlining operations, but investors are still skeptical of investing in CCL stock.

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We are still a long way away from seeing volumes return to pre-pandemic levels. Cruise lines served as virus hotspots at the outset of this crisis. Hence, you can excuse the general public’s concern in pouring capital into the industry. Even though that has nothing to do with Carnival in particular, I believe it will take a couple of years for the sentiment to change.

Management is making the right moves, so when we are out of this crisis, I expect CCL stock will rally. But the next couple of years will be rocky, so if you arent in it for the long run, you should get out right now and invest in a stock that has a more coronavirus-proof business model. However, if you are in it for the long run, then Carnival seems to have a sound strategy to weather this storm and come back stronger.

Controlling Costs Is Key to CCL Stock Growth

As I mentioned, CCL management is doing a great job in making sure costs remain low during this time. The decision to reduce its fleet is a part of this mindset and considering the short term headwinds the company faces, its an astute move. Ships will not set sail in the U.S. until September at the earlier, and that is also the case for several Europan countries. In the meantime, cruises have to make sure they have the necessary funds to survive the crisis.

That’s why CCL is assembling a war chest of epic operations. Just last week, Carnival raised a further $1.3 billion against its fleet of ships. That comes just a few months after the world’s largest cruise operator raised $6.25 billion through a mix of equity and debt at very high yields.

Total debt stood at $14.87 billion, as of May 30, up 52.67% sequentially from $9.74 billion in the previous quarter. That is a significant uptick, even more so if you look at the high-interest costs the company will end up bearing due to this fresh debt.

I would advocate a more balanced approach by management. Granted, it is vital to shore up liquidity during this time, but management should be careful not to go overboard.

Is Another Dividend Cut Around the Corner?

A question on everyone’s mind at this point is when will we see Carnival resuming dividend payments. In March, the company announced a suspension of its dividend and its stock repurchase program. At that time, Carnival also announced capital expenditures and operational cuts. That’s a good step, in my opinion, although investors will be justifiably upset with the suspension.

With the company facing a ‘zero-revenue’ scenario, it does not look likely that we will see a resumption any time soon. So anyone looking to purchase the stock for a stable dividend payment should look away at this point.

CCL Stock Valuation

At a time when earnings are negative, and there is a shroud of uncertainty regarding the future of the industry, forecasting the stock’s value becomes a bit hazy. Analyst estimates indicate that Carnival should reach a positive earnings per share figure — $1.49 — by 2022.

The tangible book value of the company is $26.19 per share, so you can certainly make a case for the stock being undervalued. However, the bulwark of its fixed assets is cruise ships, which are losing value at a rapid pace. According to shipping data provider VesselsValue, the global cruise ship fleet comprising 483 vessels lost $4 billion in value at the end of the first quarter.

If you take an EPS of $1.49, which is the estimate for 2022, I get a per-share value of $15.95 — an upside of 7.21%. I am taking a growth rate of 5% over the next 10 years and 4% for the terminal period, the discount rate I’ve picked is 12%. It’s a rough estimate, considering we are using 2022 figures, but it does indicate that eventually, the stock will pay you back. However, it all depends if you are in it for the long haul.

Final Word On Carnival Stock

Covid-19 has struck cruise lines hard, and there is little wiggle room left at the moment. Carnival is making some excellent decisions to steer the company out of this crisis. But when the virus lets up is anyone’s guess

Until this issue is firmly behind us, it’s an unknown when cruise lines will return to normalcy. CCL stock remains a hold for me. There’s just not enough to justify a buy verdict as of yet. Here’s hoping that changes soon.