Until the pandemic struck in early 2020, shares in FTSE 100 cruise ship group Carnival (LSE: CCL) had not traded below 3,000p for five years. But last April saw the Carnival share price fall as low as 605p, before recovering to close at 1,651p on Tuesday (just 4p below its price of exactly a year ago).
Will Carnival stock return to its pre-pandemic level of 3,000p? I expect Carnival’s business to recover well, but I’m not sure I’d buy the stock today. This is why.
Carry on cruising
Cruisers are well-known as ‘sticky’ customers. Once they’re hooked on the cruise ship experience, they tend to come back for more. Not only this, but many passengers are loyal to their preferred cruise brands.
Carnival is well positioned in this market. The FTSE 100 group is the largest cruise ship operator in the world and owns many of the major cruise brands. Examples include Cunard, P&O, Holland America, AIDA, Costa, and Princess Cruises.
Passenger numbers hit new records in the years before the pandemic, lifting Carnival’s share price to an all-time high of more than 5,100p in 2017.
A return to growth seems likely to me, as advance bookings for 2022 are said to be ahead of the same period in 2019. Carnival says that these bookings have been made despite “minimal advertising or marketing”.
These figures tell me that demand for cruising is likely to be strong after the pandemic. The company just has to stay afloat until then.
$9.5bn cash pile
Last year, the entire global cruise ship industry was shut down. Luckily, the financial markets have proved quite happy to support Carnival with injections of cash.
The company ended last year with $9.5bn of cash on its balance sheet. This should provide the all-important liquidity needed to get through 2021.
The only problem is that this cash hasn’t come cheap. Carnival’s long-term debt rose from $9.7bn to $22.1bn last year. Some of this cash was borrowed at quite high interest rates.
The company is already making moves to limit further borrowing by selling batches of new shares. $1bn of new shares were sold in February, for example.
Carnival’s share price: high enough already?
I’m pretty certain that Carnival will make it through to the other side of the pandemic. But I think that the recovery period could be difficult for shareholders.
In my view, a return to normal cruising schedules is unlikely until 2022. This is a view shared by City analysts. Their forecasts suggest that Carnival’s revenue this year could fall to just $4.4bn. That’s nearly 80% lower than in 2019, when revenue topped $20bn.
A proper recovery is expected in 2022. But in the meantime, Carnival must service its increased debt pile. This could put pressure on valuable cash reserves unless the company opts to raise more money by selling more new shares. This is what I expect to happen.
Carnival’s share price has risen despite the risk of future dilution from new stock issues. But if it carries out a major refinancing, then future profits will have to be split among more shares. This would make earnings per share lower than in the past, even if profits returned to pre-pandemic levels.
I think my chance to buy Carnival shares at bargain prices has passed. I don’t think the share price will return to 3,000p for some years. This stock doesn’t look cheap to me today.
