Wait for single-digit prices before buying risky carnival stock

<p>If you invested in Carnival (NYSE: CCL) at the end of 2019, you have a total return of 75.7% until April 21. While the CCL stock has recovered some of its losses in April, if it will be $ 20 or higher by 2020, it needs a lot of help.

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To say that it has been a disastrous year for the cruise industry would be a huge understatement. There is little consolation to offer Carnival shareholders, who have seen their investments go from one of the hottest to one of the worst bets on the planet.

The media headlines have started to mention the “B” word. Just ask the retailer how it has turned out. Not good.

As I write this, CCL is barely $ 12. It made me wonder if it could amount to $ 20 or higher by the end of 2020; or is it meant to fall back to single-digit numbers as the industry struggles to recover, or worse, falls to zero.

Let us consider all three options.

CCL stocks hit $ 20 before ’21

To have any hope of hitting $ 20 by the end of the year, Carnival must lean on the loyalty of its many returning customers to get records to ring again.

What we do know at this time is that the Centers for Disease Control and Prevention has closed the cruise until June 26. As a result, Carnival has suspended cruises until that date. In 2019, Carnival transported 12.9 million passengers to various cruise lines. Based on 2019 revenues of $ 20.8 billion, that is approximately $ 1,614 per passenger.

Carnival CEO Arnold Donald recently stated that 50% of its customers whose cruises were canceled during the first two weeks of March have chosen to receive credits for future cruises rather than cash refunds.

In the company’s first quarter report, Carnival said between mid-December and March 1, 2020, bookings for the first half of 2021 were slightly ahead of the previous year during the same period. Between March 2 and March 15, it booked 546 thousand occupied lower beds, significantly lower than last year’s rate.

As demand for cruises is highest during the third quarter between June and August, it is possible that Carnival may generate some revenue during two of the three months during the third quarter of 2020.

But that’s a big if.

During the third quarter of 2019, Carnival transported 3.75 million passengers. Assuming it can deliver 50% of that number in July and August, and based on an average revenue per passenger of $ 1,614, it could generate $ 2 billion in sales in the third quarter of 2020, about 31% of sales during the third quarter of 2019.

It’s better than nothing, a terrible result that can still happen for the rest of 2020.

But at best, I could easily see CCL stock trading over $ 20 this fall.

The CCL share falls to single digits

It is difficult to imagine Karneval’s shares returning to single-digit figures. Before falling below $ 8 in early April, it was last traded in single digits in 1996; America has had four presidents since then.

The last time I wrote about Carnival was mid-March. At the time, I suggested that it might be wise to wait if you are considering buying your stock as a speculative play.

At that time, CCL had just dipped in single digits; over the next month, it would continue to rise to $ 18 before falling to a 52-week low of $ 7.80 in early April. And it is now backed up around $ 12.

CCL had $ 9.2 billion in net debt at the end of November 2019, corresponding to 96.5% of its current market value. “Without the assurance that business will return once the corona virus has been eradicated, I have to wonder if $ 9 is a buy despite the large share losses in 2020,” I wrote on March 19.

“If you have not sold CCL shares, I would ride it out. If you have not bought, I would wait. There is a good chance that it can go lower. ”

If Carnival had not annoyed the CDC by allowing cruises to continue as usual in early March, I could see Carnival making its way back in July and for the rest of the year.

However, the CDC can extend the order without a sail after the end of June. If this happens, the company loses revenue at its busiest time of the year. In that case, I could easily see that it is creeping ever closer to bankruptcy.

Carnival Could Go Broke

InvestorPlace contributor Ian Bezek recently argued that even if Carnival does not go bankrupt, it does not make sense to own its shares because of the pain that will be inflicted on all cruise lines during the rest of 2020 is likely to crush its share price.

Bezek also stressed the fact that the company increased its debt burden by issuing a total of $ 5.75 billion in convertible banknotes at 5.75% and 11.5% interest.

Add this to the $ 9250 million outstanding at the end of November and we’re talking about the boat full of debt. It’s not good in the best of times, but it’s really bad when you turn off the revenue tap.

Carnival’s current Altman Z-Score is 1.41. Anything below 1.81 is considered in need and a bankruptcy application could happen within the next 24 months. However, it does not take into account its increased debt and the serious deficit in future revenues.

It is important to remember that the original Altman Z-Score was intended for manufacturing companies. Edward Altman also created a model for service-based companies. Carnival is a hybrid of the two. In the case of non-manufacturers, Altman removed sales divided by total calculation assets, but I deviate.

The point is, as sales fall off, and the company’s market capitalization decreases, the probability of its shares will zero accelerates.

At the end of the day, if you are going to make a speculative bet on Carnival, I would keep waiting for it to fall in single numbers to improve the risk of rewarding. Risk-averse investors do not have a company that owns CCL.

Will Ashworth has been writing about full-time investing since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially likes to create model portfolios that pass the test of time. He lives in Halifax, Nova Scotia. At the time of writing, Will Ashworth had no position in any of the above securities.