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The Carnival share price is recovering. Should I buy now?

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The Costa Fortuna at Port Nagasaki
Image: Carnival

It’s been a relatively good week for the Carnival (LSE:CCL) share price. While the stock is still firmly below pre-pandemic levels, it did manage to rise by almost 10% since Monday, bringing its 12-month performance to a solid 50% return. So, what’s behind this recent boost? And is it time to consider adding this business to my portfolio?

The rising Carnival share price

It’s no secret that the travel industry was decimated by Covid-19 last year. And while the sector has a long way to go before returning to pre-pandemic levels, the lifting of travel restrictions has initiated a recovery. This is fantastic news for Carnival. The firm suspended all its cruise operations to protect the safety of its passengers in 2020. And it almost went bankrupt as a result.

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It seems the worst has finally passed as cruise ships are setting sail again. In July, the management team estimated that passenger capacity will rise up to 75% before the end of 2021. This week, more positive news for shareholders came out. Several of Carnival’s brands, including Holland America, Princess Cruises, and Seabourn cruise lines, are scheduled to return to operations as early as spring next year. In other words, the business might be returning to its pre-pandemic capacity levels within the next six months.

Needless to say, this is quite encouraging progress. And if the company can stick to this timeline, I wouldn’t be surprised to see the Carnival share price continue its current upward trajectory.

Taking a step back

As promising as the return to operations is, Carnival’s share price recovery may take longer than some might expect. Even if passenger capacity returns to 2019 levels, the firm still has a less than healthy balance sheet to contend with. Maintaining cruise ships is expensive, even when they are parked in the harbour. And with no meaningful revenue being generated for most of last year, management was forced to take out new loans to keep the business afloat.

Total debt now stands at just under $31bn, up from $11bn in 2019. That’s a lot of leverage. And with a substantial rise in loan obligations comes an equally substantial increase in interest expenses. At the end of November last year, the total interest charged on debts alone came in at $907m. When accounting for the firm’s lease obligations, the bill increases to around $2.65bn.

The good news is that if Carnival can return to pre-pandemic levels of profitability, it should have sufficient cash flow to cover the additional expense. However, margins are undoubtedly going to be squeezed until the debt level can be brought back down. Therefore, I think it’s unlikely to see the return of any sizable dividends for quite some time.

The Carnival share price has its risks

The bottom line

A long-term path to a full recovery seems to have emerged for this business. And I’m significantly more optimistic about Carnival’s share price today than a few months ago. But personally, I’m convinced there are far better investment opportunities to be found elsewhere. Therefore, I won’t be adding Carnival to my portfolio today.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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