The shares of Carnival (NYSE:CCL), which is the largest cruise operator in the U.S, have plunged with breathtaking speed.Other cruise stocks like Norwegian (NYSE:NCLH) and Royal Caribbean Cruises (NYSE:RCL) have also tumbled. Note that CCL stock has sunk a grueling 65% this year. And while the shares’ valuation is at rock-bottom levels, I still think investors need to be cautious because the company continues to face significant risks.
The company’s latest earnings report, which came out last Thursday, provides a glimpse of what is looming for the company. Its earnings, excluding certain items, dropped by 50% year-over-year. In its earnings press release, Carnival stated: “As of March 15…, cumulative advanced bookings for the remainder of 2020, are meaningfully lower than the prior year at prices that are considerably lower than the prior year on a comparable basis, reflecting the impact of COVID-19.”
There were some other important items, such as the fact that two of the company’s ships are currently under quarantine, while it has withdrawn its guidance. What’s more, Carnival has voluntarily paused the global fleet operations of all of its brands.
With essentially zero revenue, the company has little choice but to work aggressively to reduce its costs. One way the company will likely cut its costs is suspending its dividend. CCL stock now has a yield of 13%, but that will probably drop to 0% soon. Carnival will also defer its capital expenditures. One thing the company has going for it is that it does not need to buy fuel.
Carnival does have $3 billion of available liquidity and has pulled down its $3 billion revolving credit line.
Yet its liquidity will probably run out as the company will still have major fixed costs to cover. In an interview with Axios, Carnival CEO Arnold Donald said: “We don’t need a bailout in terms of giving us money. Getting a loan guarantee would be helpful.”
However, the politics connected with such a guarantee could prove quite difficult. After all, cruise lines like Carnival have set up corporate structures that minimize their tax liabilities. And besides, it’s hard to argue that the industry is strategic, compared to airlines.
The Bottom Line on CCL Stock
In a research note, Wells Fargo analyst Timothy Conder noted that Carnival will need to raise $4 billion to $5 billion. To raise such money, Carnival will have to dilute the value of its stock. Keep in mind that its market cap is only about $9.5 billion. As a result, Conder took his price target on the shares from $55 to $6.
Even if Carnival is able to get government assistance, the aid will be far from a cure-all. The company is likely to face ongoing challenges. First of all, any loan guarantees will probably have onerous requirements, such as restrictions on dividends, stock buybacks and executive consumption.
Further, many people will be reluctant to go on cruises because they have been called “petri dishes” where disease can easily spread. Because of that, cruise lines will probably have to offer generous discounts.
In fact, according to Conder: “We feel that a post COVID-19 industry recovery will be elongated producing the need for additional net financing in 2021 despite current reductions in Capex, operating expenses and dividend elimination.”
So given all the uncertainties and challenges facing Carnival, it’s probably best to hold off on buying CCL stock for now.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.