I think the Carnival (LSE: CCL) share price is a bargain at current levels. At the time of writing, the stock is trading at a price-to-book (P/B) ratio of 1.1.
In my opinion, this valuation doesn’t take into account the group’s brand value and international diversification. By comparison, the rest of the travel and tourism sector is trading at a median P/B ratio of 2.1.
That said, it’s clear the group is facing some significant headwinds. It will need to overcome these before investor sentiment towards the operation improves.
Rough year
The past 12 months have been, without a doubt, one of the most turbulent periods in Carnival’s history. The group reported a net loss of just over $10bn last year as revenues virtually evaporated after the first quarter.
Pandemic travel restrictions around the world forced the company to cancel essentially all of its cruise operations from the end of March 2020 onwards, and revenues sank.
In the six months from the end of May to the end of November 2020, the group reported revenues of just $64m, compared to $11bn in the prior-year period, a declined of 99.4%.
As revenues plunged, the company had to issue new stock and raise debt to keep the lights on. As a result, Carnival’s balance sheet is significantly weaker today than it was at the end of 2019.
The good news is, the outlook for the Carnival share price is starting to improve. OK, many of the company’s US cruises remain cancelled until the end of the summer and some cancellations even go beyond that date. However, the group’s P&O Cruises brand in the UK has registered “unprecedented demand” for domestic cruises scheduled to take place over the summer. This should bring some much-needed revenue to the organisation.
Carnival share price outlook
The biggest challenge the company now faces is riding out the rest of the pandemic. If it has to cancel cruises again, its pain may last into 2022. And the longer it lasts, the harder it’s going to be for the Carnival to recover in the long term.
That said, based on the demand for the company’s recently-launched UK domestic cruises, it seems to me the corporation won’t have a problem filling its boats when it’s allowed to resume sailing around the world.
On that basis, I think the Carnival share price looks cheap at current levels. But, in the near term, the group could face further uncertainty and more challenges as it tries to navigate through the pandemic.
As such, I’d own the stock as part of a diversified portfolio of recovery plays. If the company has to push back the restart date of its US cruises once again, I think the stock will continue to trade at a discount valuation for the foreseeable future.
Therefore, I believe this is a long-term investment, as it’s unlikely the company will be back to full health for at least two years. And it could take much longer.
