Carnival Has Plenty of Liquidity to Last Until Cruising Begins

Carnival Corp. (NYSE:CCL) raised $1 billion in net equity proceeds at $25.10, in its most recent capital raise on Feb. 24. This is the fourth time the company has skillfully raised equity, all at increasingly higher prices of CCL stock. I believe that the company now has enough liquidity to last until its cruising operations begin in the summer.

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Carnival still has not begun cruising operations. On Feb. 24, the company said its pause was extended through May 31, 2021. The company also said this:

“A date for the return of guest cruising operations from U.S. ports has not yet been determined.”

However, most analysts believe that the company will be able to begin operations, at least on a limited basis, after May 21. That will help it with its liquidity issues.

Liquidity and Cash Burn

CCL stated on page S-7 of its prospectus on Feb. 24 accompanying its equity raise that its monthly cash burn is $600 million on average in its Q1 (ending Feb. 2021). This is up from $500 million per month last fiscal year. This means that its quarterly burn rate is $1.8 billion, or $7.2 billion per year.

In addition, the company has about $900 million in principal debt payment obligations through the year. That means the company needs $8.2 billion.

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In terms of liquidity, the prospectus said on page S-6 that as of Nov. 30, the company had $12.2 billion in cash. Since then CCL Corp raised another $3.5 billion in debt, raising its liquidity to $15.7 billion, less $1.8 billion in cash burn through Feb. Therefore, the forecast net cash balance now is about $13.9 billion.

In other words, with $13.9 billion, Carnival has enough money to burn $7.2 billion if it had to go thr0ugh another year of no cruise operations. Moreover, given that CCL stock has consistently moved up, it has had no issues raising the equity capital it will need if summer operations do not begin.

In a weird circular sort of way, CCL stock has risen since the market anticipated the company could raise the capital it needed. But that would not have easily happened if Carnival had not seen a higher stock price over the past year. CCL stock moved up because the stock moved up.

Oh well. That’s the way things are when short-sellers overplayed their hands. As it stands now, the shorts seem to be scared away from CCL stock. Short interest is only 6.13% of its market cap.

What to Do With CCL Stock

On March 2, Macquarie Research analysts Paul Golding and Charles Yu upgraded cruise stocks as a group. Their thesis is that with novel coronavirus cases dropping and vaccine penetration increasing, the companies will be allowed to begin cruise operations by the summer. They believe there will be a “firmer resumption” announcement by the beginning of the summer.

Their general view is that once the cruise companies start to produce cash flow, they can begin to pay down debt. This will lower interest costs, push up earnings, and eventually lead to higher stock prices.

However, CCL stock ended down to $26.09, below where the stock was the report was issued. TipRanks.com reports that there are 11 analysts who have written about CCL stock in the last three months. Their average price target is $20.43, or 21.7% below the price as of March 5. The high forecast is $31.00, or 18.8% higher.

Marketbeat.com indicates that there are 20 analysts who have written on CCL stock in the last 12 months. The average target price is $17.63, or over 32% below the March 5 price.

However, Yahoo Finance says 12 analysts (using data from Refinitiv) have an average price target of $20.61. That represents a potential drop of 21%.

Therefore, it might make sense, if you believe the majority of these analysts, to wait before buying into CCL stock. Keep in mind, though, that by the time the company begins cruising operations, the stock will likely be much higher than where it is today.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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