Most investors know how bad Carnival Corporation se (NYSE:CCL) Management team and shareholders are looking forward to a normal return. The incredible downside in the CCL stock from more than $ 50 per share pandemic to a low of less than $ 8 a year ago cites the concerns the company had earlier in this turbulent time.
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Today, the stock fell well back to the $ 26 level. That said, unlike many economically sensitive industries, shares of cruise line operators like Carnival are still far from their highs before the pandemic.
It seems that there is a cautious optimism that CCL shares could bounce back nicely if it goes back to normal. We are all looking forward to a holiday.
If you are quarantined and locked up and banned from traveling in the past year, it will do so. Indeed, a voyage sounds good to many readers at the moment. Of course, the timing and details of how the flag sector will be allowed to reopen remain uncertain.
This is why I think there is currently considerable room for optimism.
Carinval’s size and grain help CCL Stock
As with any industry, investors tend to move to companies with sufficient security to cope with the economic storms that arise from time to time. The covid-19 pandemic appears to be more of a hurricane for this sector.
That said, Carnival’s size currently makes it the most attractive option for long-term investors. From 2019, Carnival’s market share in the world shipping industry was dominant. The company controlled 47% of the total passenger volume and almost 40% of the total revenue in the sector. This is impressive.
If the sector is able to return to some sort of normalcy level, there is a strong argument that these stocks are currently undervalued. Of course, the clumsy sentiment continues to weigh this stock, and it will probably be for some time to come. Here are some key issues that Carnival is likely to face in the short to medium term.
Debt will push earnings
As a result of trying to stay afloat without actually evading government aid, Carnival has incurred a ton of debt over the past year and issued a number of shares.
The company’s debt burden has more than doubled in the past year. As a result, from now until 2024, the company owes about $ 12 billion in principal repayments on its bonds.
Given the length at which the company kept its head above water, this was expected. However, some investors are worried about the surplus that this debt burden will have on the growth of earnings going forward.
Here’s the good news. After being forced to offer bonds with a 12% return immediately after the start of the pandemic, Carnival’s return on recent issues has dropped by almost 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 to the company. It also leaves Carnival more room to maneuver over the next five years. More importantly, these effects also push Carnival’s short-term liabilities further.
Despite the treasury yields that have risen over the past few months, the corporate bond market is much more friendly to Carnival. Consequently, I think the market is starting to breathe some life into this sector.
This is welcome news for investors in CCL shares, especially since the government apparently does not want to step in to help. As in the case of the automotive industry after the Great Recession and the airline industry after 9/11, these industries will find a way to survive, and long-term investors will eventually get a return over time.
At least, that’s what the bond market is currently pricing.
Closure
Dilution and a weakening balance sheet are very worrying for investors. There is reason to believe that Carnival’s long-term earnings growth has been structurally undermined by this pandemic. Those who are clumsy on the stock have a reason to be, and I will not cover it sugar – it will be rough waters for Carnival for some time.
However, I think there is currently reason to be strong on this stock. Mass vaccinations in the US and abroad are likely to provide much more favorable conditions in the medium term.
In the long run, I think the company’s market position is key with this stock. Carnival remains the golden child of the cruise line industry. Consequently, this stock is currently high on my watchlist.
At the date of publication, Chris MacDonald (directly or indirectly) held no positions in the securities mentioned in this article.