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It is an astonishing decline – almost 60% in less than eight weeks. And in these lowest looks, CCL bearings look absurdly cheap (CUK is even cheaper). Shares are traded at approximately 5x the financial year 2019 (end of November) adjusted earnings per share. The carnival dividend now gives over 9%.
For investors who believe that the coronavirus from China will fade and US stocks will recover, Carnival seems to be an attractive “buy the dip” opportunity. These bases look way too cheap.
I am one of those investors who think that this marketed sale has gone too far. But I’m not one of those investors who wants to own CCL shares as a result. At least not yet.
The case for CCL shares
The simple case for CCL shares is that panic selling has created a buying opportunity. Negative headlines about cruise ships, including the Grand Princess, which is owned by a Carnival subsidiary, have forced customers to cancel their trips and investors to sell their shares. A US State Department bulletin on Monday advising US citizens to avoid cruise ships only made matters worse.
But this negative development is not the death knell for Carnival or for the industry.
Yes, the company will lose money. Refunds for the Grand Princess alone will cost millions of dollars. However, the effect on the CCL share is not in the millions. Carnival has lost nearly $ 20 million in market value since mid-January.
That figure is almost equal to the company’s total revenue for the fiscal year 2019. In other words, the reduction in the Carnival share only makes sense if the company was forced to run its cruises for free for an entire year.
Obviously that will not happen. In fact, the company said on February 12 that a full shutdown of its operations in Asia until April would lower the full-year result by 55 cents to 65 cents. That’s just over $ 400 million in lost revenue after tax.
With suspensions that are now likely to expand further and last longer, here will be larger. But again, the $ 20 billion hairstyle seems to be pricing in years of pain for Carnival worldwide. Contradictions would argue that this is not a likely scenario.
Take the long view
I’m not sure the long-term case is quite simple, though for some reason.
The first is that it will have a long-term impact on cruise operations for many years to come. There is pretty much zero chance that this coronavirus fear will blow over in a few days. Stock markets trigger switches. Consumers are clearing out Costco (NASDAQ: COST) for toilet paper and hand sanitizers.
This panic will end. But the memories linger. It will take time for customers to be completely comfortable with cruise ships again after hearing horror stories about week-long quarantines.
The second reason for caution is that the coronavirus may very well have an economic impact. And that in itself is a problem for cruise ships. In a recession, or even just a macroeconomic slowdown, consumer ties are tightening. Carnival’s activities in Asia and Europe in particular will take a huge hit. There are some costs to capital here simply from macro-weakness regardless of pandemic fear.
The last reason for long-term caution is that it is not as if the Carnival stock was buzzing until the end of January. The CCL share fell steadily in 2018 and most of 2019. It opened in 2020 where it began in 2016. Earnings development had basically stagnated, with increases in adjusted EPS during FY19 and FY20 mainly from share repurchases.
There was a case before January that CCL shares were a value trap that did not really price down risks. It must also be considered.
The short-term risk
Meanwhile, from a short-term perspective, there is a simple problem. CCL is a falling knife and is very dangerous to catch. In fact, it was less than two weeks ago that the entire sector managed to get a bid. It just turned out to be a “dead cat bouncing.” Investors trying to time visit this bottom risk making the same mistake.
At the same time, it is likely that there is more bad news on the way. It is possible that Carnival simply does not operate any of its vessels at any time during the spring or summer. Buying CCL shares before that time seems idiotic.
So there’s just no need to rush in here. Think of an admittedly imperfect example: Chipotle Mexican Grill (NYSE: CMG).
Its stock plummeted in an E. coli outbreak in late 2015. Next year, everything seemed quiet – but the stock would turn out to have another leg down. The shares would fall almost another 50% before the beginning of 2018.
Long-term investors in CMG performed well. But those who were patient did even better. Although the two situations are not identical, I would not be surprised to see something similar play out with Carnival shares.
Stay patient and keep your eyes open
Meanwhile, there are other options out there in this panic market. Lots of quality names have become cheaper, if not as cheap as CCL shares.
The airline’s stock has also fallen. We have seen indiscriminate sales in a cannabis sector that had already been beaten by short-term thinking. A quality name that Nvidia (NASDAQ: NVDA) has seen a 20% withdrawal. China’s growth bulls can and should pick up Luckin Coffee (NASDAQ: LK) from their peaks.
Volatility in this market creates opportunities and will create even more. But the best way to take advantage of it is to focus on quality and avoid chasing bottoms.
At present, CCL has too much risk, both in terms of its operations and its trading. That will change sometime for patient investors.
Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends FOR anyone else. The power to be “first” gave Matt’s readers the chance to bank + 2,438% in Stamps.com (STMP), + 1,523% in Ulta Beauty (ULTA) and + 1,044% in Tesla (TSLA), just to name a few . Click here to see what Matt has up his sleeve now. Matt does not directly own the above-mentioned securities.