Most investors know how badly Carnival Corporation’s (NYSE:CCL) management team and shareholders are looking forward to a return to normal. Indeed, the incredible downside move in CCL stock from over $50 per share pre-pandemic to lows of under $8 a year ago cites the concerns the market previously had with this company staying afloat in these turbulent times.
Today, shares have rebounded nicely to the $26 level of late. That said, unlike many economically-sensitive industries, shares of cruise line operators like Carnival are still way off of their pre-pandemic highs.
It appears there’s cautious optimism CCL stock could rebound nicely upon some sort of return to normal. We’re all itching for a vacation.
Being cooped up in quarantine and having lockdowns and travel bans imposed over the past year will do this. Indeed, a cruise sure sounds nice right about now for many readers. Of course, the timing and the specifics of how the flagging cruise sector will be allowed to reopen remains uncertain.
Here’s why I think there’s significant room for optimism right now.
Carinval’s Size and Moat Help CCL Stock
As with any distressed industry, investors tend to gravitate toward companies with a sufficient margin of safety to make it through the economic storms that arise from time to time. The covid-19 pandemic has turned out to be more of a hurricane for this sector.
That said, Carnival’s size makes it the most appealing option for long-term investors right now. As of 2019, Carnival’s market share in the global cruise industry was dominant. The company controlled 47% of total passenger volumes and almost 40% of the total revenues of the sector. That’s impressive.
If the sector is able to return to some sort of level of normalcy, there’s a strong argument these shares are undervalued right now. Of course, bearish sentiment continues to weigh on this stock, and likely will for some time. Here are a couple of key issues Carnival is likely to face in the near- to medium-term.
Debt Will Pressure Earnings
As a result of attempting to stay afloat with really nothing in the way of government assistance, Carnival has raised a ton of debt and carried out a number of equity issuances over the past year.
In fact, the company’s debt load has more than doubled over the past year. Accordingly, from now until 2024, the company has approximately $12 billion in principal repayments due on its bonds.
Given the lengths to which the company has gone to stay afloat, this has been expected. However, some investors are concerned about the overhang this debt load will have on earnings growth moving forward.
Here’s the good news. After being forced to offer bonds at a 12% yield immediately following the onset of the pandemic, Carnival’s bond yields on recent issuances have dropped almost in half. Last November, the company was able to raise $2 billion at a yield of 7.6%, without using the company’s ships as collateral.
These 2026 unsecured bonds are much more favorable for the company. These also allow Carnival more wiggle room over the next five years to sort out its affairs. More importantly, these bonds also push out Carnival’s near-term obligations further down the road.
Despite Treasury yields rising in recent months, the corporate bond market is being much more friendly to Carnival of late. Accordingly, I think the market is beginning to breathe some life into this sector.
This is welcome news for CCL stock investors, particularly since the government seemingly doesn’t want to step in to help. As in the case of the auto industry following the Great Recession and the airline industry post-9/11, these industries will find a way to survive, and long-term investors will eventually see a return over time.
At least, that’s what the bond market is pricing in right now.
Conclusion
Dilution and a deteriorating balance sheet are major concerns for investors. There’s reason to believe Carnival’s long-term earnings growth has been structurally undermined by this pandemic. Those bearish on the stock have a reason to be, and I’m not going to sugar coat it – it’s going to be rough waters for Carnival for some time.
However, I think there’s reason to be bullish on this stock right now. Mass vaccinations in the U.S. and abroad are likely to provide much more favorable conditions over the medium-term.
Over the long-term, I think the company’s market position is the key with this stock. Carnival remains the golden child of the cruise line industry. Accordingly, this stock is high on my watch list right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.