Stocks to sell

The travel and tourism industry has still not witnessed a strong recovery after the black swan event of the Covid-19 pandemic. Cruise stocks have been among the worst hit. Not just in terms of capacity utilization, but also in terms of the impact on the balance sheet.

With multiple concerns, it’s not surprising that Carnival Corporation (NYSE:CCL) stock has plunged over 56% in the last 12 months. The stock currently trades around $10 and seems attractive.

However, even after the big correction, I would stay away from CCL stock. Additionally, I would possibly avoid all cruising stocks in the next six to 12 months. Let’s discuss the reasons to remain bearish.

Ticker Company Price
CCL Carnival Corporation $10.66

Macroeconomic Headwinds

It is worth noting that when Carnival reported first quarter (Q1) 2022 results, there were several positives. As of March 2022, “75% of the company’s capacity had resumed guest cruise operations.” Further, bookings were strong for 2022 and 2023 with total customer deposits increasing to $3.7 billion.

From a financial perspective, Carnival reported a total liquidity buffer of $7.2 billion. Even with these positives, CCL stock has continued to trend lower.

The first reason for this correction is macroeconomic headwinds. Geopolitical tensions have impacted sentiments and with rising inflation and rising energy costs, cruising margins are likely to be impacted.

At the same time, aggressive contractionary monetary policies point to a possible recession in the U.S. A global slowdown or recession is in the cards. This will have a negative impact on the travel and tourism industry.

If capacity utilization remains weak through 2023, there is a case for an extended period of cash burn. Carnival Corporation was expecting to turn adjusted EBITDA positive at the beginning of the summer season.

Overleveraged Balance Sheet

The survival of Carnival Corporation through the pandemic came at a price. The company’s balance sheet has been significantly stressed. Of course, Carnival reported $7.2 billion in liquidity as of Q1 2022. However, that’s unlikely to impress the market. The key concern is the nearly-$35 billion in debt during the same period.

It is worth noting that the company reported interest expense (net of capitalized interest) of $368 million for the last quarter. This would imply an annualized interest expense of approximately $1.5 billion.

If the market conditions remain weak and Carnival leverages further, the debt servicing cost would swell. Even when the market outlook improves, Carnival will be focused on deleveraging.

Another concern for Carnival is rising interest rates. There is unlikely to be a case for debt repayment on maturities. Instead, Carnival will pursue debt refinancing. As interest rates trend higher, the cost of debt will increase. Through 2025, Carnival has $11.1 billion in debt maturities. Therefore, I expect the company’s balance sheet to remain stressed for the next few years.

Carnival has the potential to generate robust cash flows. In 2019, the company reported operating cash flows in excess of $5 billion. However, I don’t expect a full recovery before 2024 or 2025. Over the next 12 to 24 months, the company will continue to focus on survival. It might also imply dilution of equity. The dilution factor can push the stock even lower.

Bottom Line on CCL Stock

Carnival Corporation has suffered due to factors that are beyond the company’s control. Just as booking started to pick up, recession fears seem like another big headwind.

With $7.2 billion in liquidity buffer, Carnival is likely to navigate another crisis. However, the next few years will be dedicated to repairing the balance sheet. There is unlikely to be any rewards for equity holders.

On the contrary, there is likely to be pain with further equity dilution being a possibility. I would, therefore, avoid CCL stock, even after a big correction.

On the date of publication, Faisal Humayun did not hold (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 Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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