The most dramatic business story of the pandemic has been that of Carnival Cruise Lines (NYSE:CCL).
I have been skeptical about cruise lines in general, but especially CCL stock .
It’s the biggest cruising company, but it was leveraged toward growth before the crisis hit, and it’s even more leveraged today. Debt at the end of February was 2.5 times higher than a year earlier, at nearly $28 billion. Even in the good old days of 2019, it had just $5.5 billion in operating cash flow to deal with obligations.
The miracle isn’t that 6 of 13 analysts at Tipranks say buy it. It’s that the company is alive at all.
A Case Study
Carnival CEO Arnold Donald has turned the pandemic into a case study in crisis management, says Stuart Gilson of the Harvard Business School.
Gilson’s recent paper on Donald is the best bull case for the stock. Donald quickly cut operating expenses by $1 billion, sold older boats, and slashed capital spending. He also convinced investors to take stock for debt, restructured existing debt, and raised $10 billion to get the company through.
The price was high. One bond issue went out at an eye-popping 12.5% coupon. Even then, the bonds sold at a discount, an interest rate of 13%. Investors who took that deal have done well. A February bond sale of $3.5 billion, maturing in 2027, came off at 5.75%.
Whether stock investors have done well depends on when they got in. Shares are still 38% below where they were two years ago, when Carnival was paying a $2/share annual dividend. But if you bought after the pandemic hit, you’re sitting pretty. Over the last year Carnival shares are up 60%.
Where From Here?
Carnival is best known for its namesake line. One of its ships, the LNG-powered Carnival Mardi Gras, was built just last year. People who have been vaccinated against COVID-19 can freely cruise next month . Cruising should also start from Florida at the end of July. A federal court ruled against strict Centers for Disease Control & Prevention (CDC) protocols recently. Whether that encourages or discourages business remains to be seen.
Meanwhile, Carnival is doing all it can to maintain interest, including delivery of hamburgers it offers on its ships to peoples’ homes.
Analysts remain skeptical. They worry that a return to cruising could be a “sell the news” event. Hedge funds have been backing away from CCL stock as its price has recovered. Bears fear that indications of a quick recovery are unrealistic.
Still, there are bulls. Investorplace technician Tyler Craig sees a breakout from the stock’s old trading range. Mark Hake says CCL could move 42-57% higher, based on 2023 revenue forecasts.
The Bottom Line
Forget Carnival’s current market cap of $34 billion, which is less than twice 2019’s revenue of almost $21 billion. The enterprise value, its stock plus its debt, is more like $61 billion.
Donald has done an excellent job saving the company. But the biggest beneficiaries have been bondholders. Those who bought CCL debt at the bottom have done extremely well.
My guess is they will continue to be big winners. For stock investors the news is more mixed. While half of America is now vaccinated, half is not. Most people around the world are not vaccinated, and more dangerous variants of COVID-19 are spreading fast.
I like cruising. I would like to cruise. But not before it’s safe. Donald still has his work cut out for him. I would wait for truly fair weather before buying CCL stock.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.