Investors who look at Carnival (NYSE:CCL) on price alone could be tempted to buy given current levels. Even before yesterday’s 14% plunge, the shares were already off nearly 52% year-to-date and an even greater 66% since their pandemic peak in early June 2021, the timing is undoubtedly attractive.
For comparison, the Defiance Hotel, Airline, and Cruise ETF (NYSEARCA:CRUZ) is off 25.8% YTD and 30.3% from a year ago. CCL stock, at 6% of the exchange-traded fund’s portfolio, is the fifth-largest holding among the 57 stocks.
But for the most ardent bottom fisher, Carnival likely has farther to fall. As you likely guessed, the confluence of factors from gas prices to inflation will play a huge part of how much more Carnival falls.
Morgan Stanley yesterday went so far as to cut its target to $7 a share from $13 and slapped on a new $0 per share bear case, citing escalating leverage and after the cruise operator posted “weak” Q2 result and guidance for full-year 2022 and 2023.
|Carnival Corporation & plc
There are multiple reasons to believe Carnival has further to fall. Two of the most obvious, and most powerful, are fuel prices and inflation. The fact is that there are few companies in a less-advantageous position than the major cruise lines right now.
Inflation dictates so much of what consumers can and cannot do. But stated simply, the higher inflation rises, the less likely consumers are to make splurge purchases on luxuries like cruises.
And when headline inflation reached 8.6% in May it was indeed a very bad sign. March inflation reached 8.5%, putting consumers and economists on alert. But there was reason for cautious optimism when rates fell slightly, to 8.3% in April. The hope then was that May numbers would be lower than 8.3%. When that didn’t happen it renewed fears that the Federal Reserve simply doesn’t have things under control.
Less control at the macro level means tighter purse strings in the home, which in turn means fewer cruise tickets being purchased. Cruises simply aren’t a necessity.
Big ships use a lot of fuel. In fact, fuel is the second-largest expense for cruise lines behind payroll. So, the higher the price of fuel, the more likely it becomes that Carnival will have to pass those charges on to the customer.
Analysts with both Wells Fargo and Stifel are souring on Carnival stock for the same reasons, citing macro pressure and rising fuel costs. Analysts with both firms recently downgraded CCL shares following last week’s earnings which included larger-than-expected losses.
But fuel cost concerns are hardly a novel headwind for cruise operators like Carnival. And surcharges remain a distinct possibility. There is precedent in the previous economic downturn when 16 cruise lines invoked fuel surcharges between $5 to $10 per person per day. The justification then was oil prices that had risen above $100.
We are currently at that level. Although Carnival hasn’t added such a surcharge yet, a survey conducted in March made it clear that cruise lines were considering it. If and when such an announcement occurs, you can expect Carnival share prices to fall.
Cruise to Nowhere
So, what should investors do who want to time Carnival’s bottom? Just wait. There is no immediate indication that oil prices are going to turn around. Predicting where oil is headed is notoriously difficult. That said, Goldman Sachs sees the price of a barrel reaching $140 by summer’s end. That will certainly keep CCL stock lower.
Likewise, if the Fed raises rates by an additional 75 basis points in July as expected, economic worries will rise again. In short, anything that raises the specter of higher inflation lowers Carnival’s market price.
And nothing looks positive right now, so a market bottom has not been reached for CCL stock, leaving investors on a cruise to nowhere.
On the date of publication, Alex Sirois 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.