<p>The wild ride in shares of the Carnival (NYSE: CCL) stock gives speculators and demersal traders a chance to trade their volatility.
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Still, the luxury cruise industry faces a major challenge that it may not overcome. The new corona virus shut down the tourism industry in the short term. The long-term damage to the sector is likely to disappear when travelers resume their adventures.
However, if demand for cruise lines is slow to recover, CCL shares may underperform the markets.
Carnival Shores Up Its Liquidity
Carnival will need to raise billions in debt just to keep operations to a minimum. With cruise ships docked and the company unable to maintain its customers, investors should expect significant operating losses at least in the next few quarters.
Carnival still has to pay its suppliers and staff. In addition, it must maintain ships even if they are not going anywhere. Investors can still not shake off the immediate problems that lie ahead. With restrictions in place and a ban on the cruise industry, CCL shares have no positive catalysts to lift it.
Looking beyond the current pandemic in Covid-19, when restrictions ease and travelers plan for 2021 vacations, Carnival can begin to accept bookings. But buying CCL shares when most major countries are in a lockdown will test investors’ nerves. In addition, cruise line companies may need to increase advertising spending and offer steep discounts to stimulate demand. It would damage profit margins and lead to quarterly losses.
No rescue is needed
The recent multi-billion dollar bailout for the tourism industry did not include companies such as Carnival. Arnold Donald, Carnival’s CEO, said that “We do not need a rescue when it comes to giving us money.” Even if CCL shares were collected in the hope of such help, Carnival does not need it.
To maintain its financial liquidity, the CEO still said that “a loan guarantee would be helpful.”
The company has a portfolio of brands that includes Holland America, Princess Cruises and Seabourn. It has a cruise line in the UK, Germany, Australia and Southern Europe. It attracts almost 13 million guests every year.
Carnival has a strong balance sheet. The debt / equity ratio is 0.5 times. Nevertheless, its debt grew at a compound annual growth rate of 1.6% since 2014. At that time, net debt was $ 7.4 billion, but then it rose to $ 9.3 billion.
Higher investments damage free cash flow. When the FCF fell in the short term, the company could cut its dividend to preserve cash. The company can reduce costs, reduce staff and refinance its debt at lower interest rates. This will not prevent a quarterly loss, but will ensure its long-term survival.
Valuation of CCL stock
Analysts are either too optimistic or failed to update their price targets on CCL stocks. The average price target is $ 41, according to TipRanks, although most ratings are in the “hold” category. In a 5-year discounted cash flow EBITDA exit model, assume revenue falling by 50% this year. Sales will improve from the financial year 2023:
(USD in millions) Initial forecasts Financial year ending 19-Nov 20-Nov 21-Nov 22-Nov 23-Nov 24-Nov Revenue 20 825 10 413 7 809 7 809 9 762 14 643% Growth 10.3% -50% – 25% 0% 25% 50% EBITDA 5437356 2188 2134 2874 4311% of revenue 26.1% 3.4% 28% 27.1% 29.4% 29.4%
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In the above scenario, the CCL share is worth $ 19 per share.
Buying CCL shares before the uncertainty has reached its peak is dangerous. Those who guessed the bottom will be rewarded. Cautious investors may want to wait for clarity before starting a position in Carnival.
Chris Lau is a contributing author to InvestorPlace.com and many other financial websites. Chris has over 20 years of investment experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace at Seeking Alpha. He shares his stock choices so that readers get original insights that help improve return on investment. At the time of writing, Chris had no position in any of the above securities.