Carnival‘s (NYSE: CCL) The low stock price and strong brand make it seem like a solid way for investors to bet on a rebound in the tourism industry. Previously, I argued that a quick restart in cruise operations could bring the company back in the third quarter. But new developments in the coronavirus pandemic have made the stock significantly more risky in the short term. The increase in new cases of COVID-19 is dramatically worsening Carnival’s risk-to-reward proposition.
Here are two reasons to proceed with caution.
Image source: Getty Images.
Coronavirus is making a comeback
COVID-19 infections are reemerging in the United States, prompting some states to reverse their reopening plans and put restrictions on some high-risk companies like bars and restaurants. This is terrible news for Carnival as it looks to resume operations and start making money again.
On April 15, the CDC renewed its order not to sail, extending the cruise ban by 100 days. The restrictions will expire on July 24. But with the increase in COVID-19 infections, CDC will likely extend its restrictions for an additional 100 days, meaning the order will now expire on November 1.
Carnival may also face restrictions from other countries that may be reluctant to open their ports to US vessels due to its high infection rate.
Carnival’s management has extended its operational hiatus until September 30 in light of these challenges. This is the third time the company has delayed its restart date, but it may still be overly optimistic.
Carnival’s debt burden is alarming
Carnival’s management is confident in the company’s ability to avoid bankruptcy. According to CEO Arnold Donald, Carnival can survive 2020 without cruise revenue. But with potentially lasting navigation restrictions through the fourth quarter, the company will close it.
To guarantee liquidity, Carnival has accumulated a large amount of debt that could harm shareholder value through costly interest payments.
In a preliminary second-quarter report released June 18, Carnival reported $ 7.6 billion in available liquidity on its balance sheet. This sum will not last long at current cash burn rates because the company expects a net loss of $ 4.4 billion in the second quarter. It will likely report a similar loss in the third quarter as operations are paused until September 30.
To shore up liquidity, Carnival has valued an additional secured credit line of first priority with some fairly long terms.
The debt consists of a tranche of $ 1.86 billion and a tranche of 800 million euros ($ 898.5 million). Interest payments are a fixed rate of 7.5% in addition to a variable rate based on Libor, an average of interbank interest rates. The company’s cost of capital could be even more expensive in the future because S&P and Moody’s both downgraded their credit rating to the junk state in June (BBB- and Ba1, respectively).
To carry out
The carnival stock has become significantly more risky due to the resurgence of the coronavirus pandemic. With the increase in infections in the U.S., the administration has delayed its schedule to restart operations, and U.S. health authorities are more likely to extend its banning order on July 24.
Investors should think twice before buying Carnival shares in this uncertain economic environment.
