When It Comes to Carnival Corporation Stock, It’s Long Past Time to Abandon Ship

Shares of the world’s largest cruise company, Carnival Corporation (NYSE:CCL) are up more than 30% in the past three months, but that doesn’t make CCL stock a buy.

Carnival cruise (CCL) ship on the waterSource: Ruth Peterkin / Shutterstock.com

The cruise line sector has been rallying in the past few months due to the approval of the Covid 19 vaccines.

Carnival and its peers haven’t even started to recover from the pandemic. Carnival has been struggling to restart its operations, delaying most departures until at least April 30. Therefore CCL stock offers little or no upside at this time.

The CDC’s no-sail order expired in October, but none of the cruise liners have been able to kickstart their operations. Carnival had planned to return to the seas in early 2021 but later announced that it wouldn’t be restarting its operations as expected.

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Different Covid-19 strains are dragging on the pandemic and could potentially result in a cruise-less 2021. Therefore, Carnival and other cruise liners will have to burn through their cash reserves and hope the situation improves rapidly with the pandemic.

Mounting Debt Levels

Every month of delays places Carnival in a precarious situation from a financial standpoint. It recently reported its preliminary results for the fourth quarter, which showed a whopping net loss of $2.2 billion.

Additionally, through various debt and share offerings, it raised roughly $20 billion since the pandemic took its course. Its liquidity stood at roughly $9.5 billion at the end of November.

The company’s CEO believes that the cruise liner has enough cash to survive without setting sail this year. It doesn’t seem plausible at this point, and the company is likely to announce new share or debt offerings to stay afloat. CCL could burn more than $2 billion just in the period before it potentially restarts operations.

Carnival was previously forecasted to burn approximately $600 million per month for the first quarter of 2021. Capital expenses have pushed up its cash burn rate from $500 million in the fourth quarter of 2020.

Naturally, the pandemic is bound to end at some point, but it leaves Carnival with an overleveraged balance sheet. Total debt exceeds $28 billion at this time, which dwarfs its cash balance of roughly $9.5 billion.

The company has spent approximately $600 million in interest expenses over the past 12 months, which could reach $1 billion due to its unwarranted borrowing. On top of that, roughly $2 billion of its debt is likely to mature this year, which further complicates its problems.

More Dilution in the Cards

In dealing with its massive cash burn, Carnival was compelled to offer more shares to raise funds. Since the start of September, it has sold roughly $3.5 billion worth of shares and converted $1.5 billion of debt into shares. Most recently, it raised another $1 billion by selling 40.5 million shares at roughly $25 per share.

The majority of the industry is shut down, and the new Covid 19 strains continue to delay proceedings. Carnival stated that demand for the second half of the year was in line with historical ranges.

Most recently, though, we have seen how more than 40% of passengers from canceled cruises opted against taking refunds to push their trips for another date. Therefore, it is incorrect to assume that demand will in line with historical right after the restart. Demand numbers are fudged with future credits, which need to be taken into account as well.

Final Word on CCL Stock

CCL stock is in a tough spot, as is the cruise line industry. It has suspended operations again, which raises concern about whether it would ever set sail this year.

With the delays, its cash burn and debt levels continue to grow. Moreover, in controlling its debt burden, Carnival is forced to dilute shareholding and issue new shares. Therefore, investing in CCL stock at this time is a definite no-no.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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