Carnival (NYSE:) Corporation & plc (CCL), operates as a leisure travel company. There are approximately 700 ports it visits under different brand names. The company sells cruises mostly through tour agents and travel agencies. 

Cruise lines suffered the worst effects of the COVID-19 epidemic. It is difficult to socially disengage on cruises unless it is totally ruinous for passengers.

Ships are now sailing again after political battles for masks. You may recall cruise ships being stuck off the coast for several weeks because ports refused entry to them due to crew and passengers who were COVID positive.

The entire cruise industry had to stop cruising in Spring 2020. Carnival saw its revenues drop, the shareholders suffered from dilution, and huge amounts of debt were accrued. (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. In total, the net loss was over $10.2 billion. Important to note that the airline industry received billions in bailouts while the cruise sector was left without any.

Because cruise lines aren’t American companies, they were not eligible for stimulus. These lines are generally exempted from American taxes and therefore there wasn’t much interest to help them with American taxpayer dollars.

Carnival’s bottom line has suffered even worse this year, with $75 million of revenues in Q1 & Q2. Another $4 billion has been lost so far.

The company has decimated shareholders by dilutions and debt issuances in order to survive. First, the number of outstanding diluted weighted shares has increased to 1.13 billion by the close of fiscal Q2 2021. It was 721 million in fiscal Q2 2020.

This makes earnings per share look much better. Although it may seem like a good idea to spread the loss on more shares, shareholders will suffer long term. The company won’t be purchasing stock back anytime soon due to its massive debt.

The debt anchors future results even worse than the dilution. In fiscal 2019, $11.3billion was owed on long-term bonds, which includes current obligations. This number jumped to $27.7billion by Q2 fiscal 2021. There was also $3 billion of short-term borrowings.

In context, the annual net income of the company was $3 billion in 2018 and $3.2 billion in 2019. It would take 10 year to repay debt at this rate if every dollar of income was used for that purpose. This assumes that the company can run at maximum speed, which it isn’t.

Risks Are Too Steep

If this were not bad enough, the company has pushed the sailing of many ships back to 2022. Santa Barbara (California) is another port which has decided not to reopen by 2022.

A resurgence of COVID-19 via another variation would prove to be even more devastating for the company. It is likely that the company will be better off filing for bankruptcy than reemerging in the same way General Motors (NYSE 🙂 did during The Great Recession.

Stockholders should remember that in the event of a reorganization they will be paid the least on the totem pole and could lose their entire investment.

Investors shouldn’t put money into stocks that aren’t thriving due to the number of businesses currently in existence.

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. CCL stock has 16.9% upside potential, with an average price target of $27.91.

CCL is rated a 2/10 by TipRanks, indicating very low investor sentiment.

Summary

The COVID-19 pandemic was devastating to the cruise industry — and the carnage continues. CCL is unlikely to be fully recovered for many years.

CCL can only be fully recovered if creditors are able to pay off debts in bankruptcy. Shareholders should know about this possibility.

Disclosure: Bradley Guichard had no position in any of the securities discussed in this article at the time it was published.

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