It’s been tough for the Carnival (LSE:CCL) share price since the pandemic began. After cancelling most of its cruise line operations out of safety concerns for its passengers, the business saw its stock price crash by nearly 85% in the first three months of 2020. But since then, the company has been recovering in correlation with the rollout of Covid-19 vaccines. Consequently, Carnival’s 12-month performance now stands at just under a 50% increase in share price. And in the last 48 hours, the stock has jumped another 13%.
What’s behind this recent surge? And is now the time to add some shares to my portfolio? Let’s take a look.
The surging Carnival share price
A few days ago, the Carnival management team made an announcement following the removal of lockdown restrictions in the UK. The cruise line operator has begun relaunching its ships. Across its eight cruise line brands, a total of 54 to 63 ships are expected to resume guest operations by the end of 2021. That certainly sounds promising since it equates to roughly 65% to 75% of the company’s cruising capacity. For its Carnival Cruise Line brand, the return to the seas has already begun with three due to set sail in September, and another four in October.
Needless to say, this is fantastic news for passengers who have been eagerly awaiting a much-needed holiday for over a year. And it’s a sigh of relief for investors now that revenue is starting to flow once more. So, I’m not surprised to see the Carnival share price surge on the news. But is now the time to buy the shares? Maybe not.
The road to recovery
As promising as this announcement is, there remains a long trip before Carnival and its share price can return to pre-pandemic levels. For many years, the high operational cost of running a cruise line has been quite advantageous as it created significant barriers to entry for competitors. However, this advantage mutated into a severe weakness once the pandemic began.
With revenues plummeting and high maintenance costs staying the same, the management team had to rely heavily on additional debt financing. In total, the company now owes $26.96bn in loans. And where there’s debt, there’s interest. In 2020, Carnival’s interest bill came in at $907m. That’s nearly 300% higher than pre-pandemic levels.
It’s worth noting the business has a decent amount of liquidity, in my opinion. With $9.5bn of cash on the balance sheet, Carnival should be more than capable of meeting its short-term obligations. But until debt levels are significantly reduced, net profit margins, dividends, and consequently the Carnival share price will likely struggle to return to their former glory.
Personally, I do believe the worst has passed for this business. However, I think there are far better investment opportunities to be found elsewhere. Therefore, I won’t be adding any shares to my portfolio today.
