<p>Coronavirus from China gives the audience “I have never taken a cruise” its moment. And when you combine that with the “I will never cross again” mob, it looks bleak for Carnival (NYSE: CCL). However, I urge you to remove the emotions from your analysis (which all investors should). When you do, you can make a case for CCL shares as a potential comeback story.
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But much depends on what Carnival does to deal with the crisis. InvestorPlace analyst Matt McCall quoted how the Chipotle stock (NYSE: CMG) recovered after having to deal with an outbreak of a foodborne illness. Although I agree with McCall that in some cases this is an imperfect example, it is also a reminder of human behavior.
As I have written about Chipotle in the past, the company was transparent. And that’s what will be required of Carnival now. The company did not cause the coronavirus. But Carnival, along with other cruise ships, has Christmas work to do to convince consumers that cruising is safe.
To this end, a very positive step is for the whole industry to establish its fleet.
Coronavirus panic leads to blurred math
InvestorPlace Will Ashworth recently tried to understand the CCL share. Ashworth looked back on the recent Carnival performance of economic turbulence. His concern is for the company’s net debt, which due to Carnival’s declining market capitalization is now 96.5% of its current value.
But the more you try to find a point of reference for Carnival’s recent difficulties, the more you realize that this is really another type of crisis. For example, Carnival’s total debt is less than 25% of its total assets.
In addition, the money that Carnival has generously returned to shareholders in terms of dividends and repurchases, and will likely be used to compensate for a massive decline in revenue.
And, as distasteful as it may be for some investors, the industry is likely to receive funding as part of the federal government’s aid package to save the US economy.
Has anything really changed?
Did you know that before the outbreak of the coronavirus, the cruise industry was the fastest growing category in the leisure travel market?
Also, if I were to say that you could buy shares in a company that was profitable and paid out a consistently rising dividend?
That was the situation that Carnival found itself in when the calendar turned to 2020. Unfortunately, the news has been bad ever since. Its cruise ship, the Diamond Princess, had an outbreak of coronavirus. And unfortunately, the number of confirmed cases from a ship is more than in some countries.
But if history teaches us anything, it is that people have short memories. What is different about this crisis for many travel companies is that the problem is not the creation of them. Boeing (NYSE: BA) continues to handle the fallout from two passenger jet aircraft that are directly linked to software on the company’s aircraft.
Carnival’s PR challenge is different. Most consumers do not blame Carnival for coronavirus. But they find the whole idea of being close with thousands of other passengers to be a personal health risk. This is a broader challenge for Carnival and the entire cruise line industry.
The conclusion on CCL stock
As difficult as it may be, investors need to get rid of the negative sentiment surrounding the CCL stock. At the same time, there is no reason to believe that the stock will climb to the heights it saw in 2019. But right now, investors would like to take something in the middle.
And if you look at the historical trend for the CCL stock, the $ 25- $ 30 per share range looks like the sweet spot. But without the income coming in for the foreseeable future, it is unlikely that the share will get anywhere near that. And in fact, it may need to fall further.
However, I repeat that consumers have short memories. Once the corona virus has withdrawn a bit from our collective memories, the cruise industry will be among the more economical vacations available. When that happens, I guess many consumers will realize that “never” is quite a long time. And it can fuel an elevator in Carnival warehouses as well as other cruise line warehouses.
And the Americans are basically in a locked position next month anyway. Simple math suggests there is no reason to own the stock at this time. But if you dismiss the stock‘s long-term potential because of what consumers say they will never do, you should reconsider.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. At the time of writing, Chris had no position in any of the above securities.