It’s terribly tempting to kneel on cruise line supplies these days. Industry leader Carnival (NYSE: CCL) (NYSE: CUK) trades in 2020 72% lower, and smaller rivals Norwegian Cruise Line Holdings (NASDAQ: NCLH) en Royal Caribbean Group (NYSE: RCL) are also one of the biggest losers this year.
With so many market estimates trading sharper higher and the market now firmly on positive ground, there will be some bottom feeding among the cruise line stocks. It could be a big mistake. A fatal error when chasing a sinking front army is assumed to be that the ceiling is suddenly higher. Carnival’s stock can go up three times from here and still not be where it was when the year began. That’s it all only if the cruise line operator can return to where it was at the end of 2019. Unfortunately for Carnival and its speculators, it will not soon return to form.
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Fire sail
The current fate of the sector is pretty well anchored. All major cruise lines have canceled their US flights, as have most of their international sailings by at least early November. Roughly half of the passengers on suspended sails have asked for their money back. The other half has agreed to accept sweet credit on future sails. We see a money floor once again Carnival and her peers are back on the open water.
The good news is that Carnival has raised more than $ 10 billion through a series of financing transactions. Couple that with cutting billions in operating costs and capital expenditures after scaling up its fleet by wasting property and postponing new ship deliveries and Carnival will survive. A month ago, it said it had enough liquidity to sustain itself for a full year, and it has continued to take financing steps.
The bad news from an investing standpoint is also all that has been mentioned before as good news. The price of extra liquidity is that more debt translates into more interest costs, and that means lower profits. More shares issued in financing efforts reduce profits on a per-share basis. Even if Carnival’s fleet were at full strength, it would not have landed anywhere near last year’s highest profit level.
A few weeks ago, Deutsche Bank analyst Chris Woronka offered a look at the diluted and unpacked-told future of Carnival. Among the additional $ 850 million in interest expenses, he estimates the cruise line will be until 2023 and the larger share counts, the $ 4.40 a share reported last year in profit would be just $ 2.88.
In fact, the future could be even less profitable. Requests will not be returned at any time, even if a successful fax is deleted. A prolonged recession will keep prices in check, even with fewer ships in Carnival’s portfolio.
Things need not end badly for Carnival. The economy could recover quickly, and consumer sentiment about the safety of cruising can be repaired sooner rather than later. Assuming that Carnival just has to get back to where it was when it was in peak form last year for the stock market to regain its former height is not reasonable. The ceiling is not as high as many investors think, and estimating the long-term gains here is the worst mistake investors can make of carnival.
