Carnival Cruise Lines: Pandemic Damage Runs Deep

© Reuters. Carnival Cruise Lines: Pandemic Damage Runs Deep

Carnival (NYSE:CUK) Corporation & plc (CCL), operates as a leisure travel company. Its ships visit approximately 700 ports under various brand names. It sells its cruises primarily through travel agents and tour operators. 

The COVID-19 pandemic was the perfect storm for the travel industry, and cruise lines were perhaps the most damaged of all. Social distancing on a cruise is not possible, unless the experience is completely ruined for passengers.

Political battles over masks turned to vaccines, and only recently are ships again sailing. Many may remember cruise liners stuck offshore for weeks at a time, as ports denied entry due to COVID-positive passengers and crew.

In Spring 2020, the entire industry was forced to cease cruising. During this time, Carnival's revenues plummeted, shareholders were badly diluted, and massive amounts of debt were accumulated. (See CCL. stock charts on TipRanks)

I am bearish on CCL stock.

Debt, Dilution an Anchor for Shareholders

Revenues plummeted in fiscal 2020, falling 73% to just $5.6 billion from $20.8 billion in 2019. Total net loss topped $10.2 billion. It is also important to remember that while the airlines were bailed out to the tune of many billions, the cruise industry was not.

Cruise lines were shut out of stimulus talks because they are not American corporations. They are largely exempt from American taxes, and there was therefore little appetite to use American taxpayer money to assist them.

This year has been even more unkind to Carnival's top line with just $75 million in revenues through Q1 and Q2. The loss so far is another $4 billion.

To survive, the company has ravaged shareholders through dilution and debt issuances. First, the diluted weighted-average shares outstanding have ballooned to 1.1 billion as of the end of fiscal Q2 2021, from 721 million as of fiscal Q2 2020.

This actually makes the earnings-per-share figures look better. Spreading a loss against more shares will do that, however it is incredibly damaging to shareholders in the long run. Further, due to the massive debt accumulated, the company will not be buying back stock anytime soon.

As bad as the dilution is, the debt is even more of an anchor on future results. At the end of fiscal 2019, the company reported $11.3 billion in long-term debt, including the current portion due. By Q2 of fiscal 2021, this figure exploded to $27.7 billion, with another $3 billion in short-term borrowings.

For context, in 2019 and 2018, the company reported $3 billion and $3.2 billion, respectively, in annual net income. At that rate, it would take 10 years to repay the debt if the company used every dollar of net income for this purpose. That's assuming the company is functioning back at full throttle, which is not the case.

Risks Are Too Steep

If this were not bad enough, the company has pushed the sailing of many ships back to 2022. Some ports, like Santa Barbara, California, have also decided not to reopen until 2022.

Even more frightening, a resurgence in COVID-19 through another variant would be catastrophic for the company. The fact is that the company would likely be much better off discharging its debt in bankruptcy and reemerging much like General Motors (NYSE:GM) did during the Great Recession.

Stockholders would be wise to remember that in the case of a reorganization, they are lowest on the totem poll to get paid, and would likely lose their entire investment.

With the plethora of companies currently thriving, why would an investor want to put their hard-earned cash into this stock?

Analysts Rightly Pessimistic

Wall Street analysts are bearish on CCL stock, with four Buy, two Hold, and four Sell ratings assigned in the past three months. The average CCL price target of $27.91 implies 16.9% upside potential.

According to TipRanks' Smart Score assessment, CCL scores a 2 out of 10, with very negative investor sentiment.

Summary

The COVID-19 pandemic was devastating to the cruise industry -- and the carnage continues. It will takes years, or decades, to fully recover for CCL.

The only way to recover quicker would be to discharge debts through bankruptcy, and shareholders should be aware of this very real possibility.

Disclosure: At the time of publication, Bradley Guichard did not have a position in the securities mentioned in this article.

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