Shares of Carnival Corporation (NYSE:CCL) are down roughly 27% after canceling its entire U.S. fleet until Dec. 31. With the CDC’s no-sail order expiring late last month, investors felt the cruise liner would quickly get the ball rolling again. However, the opposite has transpired so far, with the company in no mood for a fast turn-around. With Joe Biden winning the presidency and with the rising Covid 19 cases worldwide, the prospects look bleak for CCL stock.
The cruise line industry will continue to be heavily regulated until the Covid 19 pandemic is controlled fully. Hence, cruise liners such as Carnival would have to operate at a limited capacity and implement safety protocols.
Demand for cruise sailing should remain stunted, with most international borders remaining closed. Therefore, managing liquidity becomes of paramount importance for Carnival and other cruise liners.
Let’s dive a little deeper to understand Carnival’s dire situation.
Abysmal Third Quarter
With its ships still docked, Carnival’s third-quarter results were bound to be dreadful. Revenues were down 99.5% year-over-year to $31 million.
Additionally, its loss for the period was at $2.90 billion. The company had generated a profit of $1.76 billion in the same period last year. The company is expected to have earned 70% less in revenues this year compared to last year.
However, with the restrictions in place, the focus is more on its liquidity position than anything else. With a monthly cash burn rate of $770 million, the company’s liquidity balance stood at $8.2 billion. The rate is expected to fall to $530 million in the fourth quarter, meaning its liquidity balance would drop to $5.02 billion in six months.
With a capital-intensive business such as Carnival, it’s tough to imagine how it could do without burning massive amounts of cash each month.
In normal circumstances, it would enough to cover its costs with its profits. However, with little or no revenue, the company is will retire parts of its fleet and dilute existing shareholding through ATM offerings.
Another problem for the company is its total debt, which is at a whopping $26.34 billion. The company is overleveraged, and many agencies have already assigned junk credit ratings. With the growing losses, it becomes challenging for it to pay off the debt. Its 1-year long-term debt change is at a staggering 112.7%.
Rough Seas Ahead
Many expected Carnival to get back up and running after the CDC’s no-sail order expired on Oct. 31. However, on November 2, the company announced its North American fleet would remain docked until December 31. A few days later, its subsidiary, Costa Cruises, announced it was suspending its cruises to Greece until Dec. 26.
With the second wave now well and truly here, things are likely to get even tougher for Carnival and its peers. You also have Joe Biden as President-Elect of the U.S., who is likely to have a more pro-active approach towards controlling the virus.
The removal of the no-sail order was mainly due to the Trump administration’s aggressive stance towards tackling the virus. Even if Carnival restarts by early 2021, it is tough to say when it will operate at a considerable capacity.
Bottomline on CCL Stock
Carnival Corporation and other cruise liners are having it tough to restart their operations after the no-sail order expiry. The rising Covid 19 cases and the pro-active stance of President-Elect Joe Biden are likely to lead to further delays and disruptions.
Carnival’s liquidity position is a cause for major concern with a massive cash burn rate. It will be interesting to see at what capacity it returns to when it returns next year. However, in all likelihood, things are likely to progress very slowly, making CCL stock a highly unattractive investment at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article