Over the past 12 months, the Carnival (LSE: CCL) share price has plunged a staggering 60% excluding dividends. This performance has taken the stock down to levels not seen since the financial crisis.
In my opinion, this decline is warranted. Since March last year, the group has been unable to run most of its cruises. The result has been a staggering decline in sales. For the three months to the end of August 2019, Carnival’s revenues totalled $6.5bn. For the same period in 2020, the organisation brought in just $31m. That’s a 99.5% decline in revenues year-on-year.
But as the world’s coronavirus vaccination rollout gets underway, the outlook for the Carnival share price is beginning to improve. As such, I’ve recently been taking a closer look at the business to see if it could be worth adding the stock to my portfolio.
A return to growth
The most optimistic City analysts believe Carnival will be back up and running in 2022. In this optimistic scenario, analysts estimate the group’s revenues could hit $16.5bn for its 2022 financial year. Unfortunately, this recovery is by no means guaranteed. The optimistic projection assumes consumers will be happy to travel again and return as soon as restrictions are lifted. This may or may not happen.
Even if it does, forecasts for profitability are pretty disappointing. Carnival has had to borrow billions of dollars over the past 12 months to keep the lights on. The interest costs on these debts are expected to eat up the majority of the group’s income going forward.
These are the primary challenges the business faces, but there are also opportunities. Over the past 12 months, UK consumers have saved a tremendous amount of money by not going on holiday. They may rush to spend these funds when the pandemic recedes. The same is true of consumers elsewhere. This may mean even the most optimistic analyst projections are currently too conservative.
Further, some of Carnival’s peers have not been so lucky and have collapsed. This could play into the group’s hands over the next few years, as it snaps new business from former competitors.
The outlook for the Carnival share price
Carnival faces plenty of challenges in the years ahead. The company also has plenty of opportunities. This makes it challenging for me to establish if the stock is worth buying at current levels.
What really concerns me is the group’s level of debt. At the end of its last fiscal quarter, the company had net debts of $17.5bn, up from just $9bn at the end of fiscal 2018. This is incredibly concerning for a business that has no revenues, and I’m not particularly eager to buy stocks with a massive amount of debt.
As such, I am going to avoid the Carnival share price until there’s more clarity on its future.
