The Carnival (LSE:CCL) share price has been on a good run recently. Following its latest quarterly report, the upward momentum accelerated last week. And as a result, the stock jumped by nearly 10%, pushing its 12-month performance to just over 90%. That’s quite impressive for a company that was on the verge of bankruptcy last year. Let’s take a closer look at the results and see whether now is the time for me to hop on board as an investor.
The rising Carnival share price
In 2020, the pandemic forced this cruise line operator to essentially halt all its operations. With virtually no cash flow to cover the interest expenses on its sizable debt and maintenance costs, the company found itself close to insolvency. But thanks to successful negotiations with creditors, management was able to make it through. At least, for now. And the Carnival share price has been slowly recovering since.
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For the last nine months, the firm reported a loss of $6.88bn. That’s obviously a lot of money to lose. But that’s down from $8.01bn in 2020. This improvement comes from the return of its cruise line operations. So far this year, 34 ships have returned to the seas, with another 21 expected to set sail before the end of 2021. And by June 2022, the remaining 16 ships in its fleet will also be returning to international waters.
With the fleet returning to full capacity, CEO Arnold Donald has revealed that total bookings for the second half of 2022 are at a record-breaking high. And since May earlier this year, customer deposits have jumped from $2.5bn to $3.1bn. Combining these encouraging numbers with its $7.8bn of liquidity to see it through to mid-2022, the worst appears to be over for Carnival and its share price. Having said that, there remain some significant risks.
The risks ahead
Running a cruise line is not exactly a cheap endeavour. Historically, its high operating costs were somewhat advantageous as they created a high barrier to entry for competitors. But in 2020, this advantage turned into a disability. Even though its ships remained parked in-harbour, fixed costs like maintenance, port fees, and essential staff still had to be paid. And with revenue falling by around 75%, management had no choice but to raise additional capital through financing.
Consequently, debt levels erupted from $11.5bn in 2019 to $30.8bn as of May this year. Fortunately, the vast majority of these loans don’t mature for a couple more years. However, where there’s debt, there’s interest. Even if the firm can return to pre-pandemic levels of profitability, due to its increased leverage, almost a third of its underlying profits will be gobbled up by interest expenses. When factoring in the lease expenses on its ships, it’s closer to 80%.
Needless to say, that leaves very little spare capital to fuel growth, pay down debts, and reward shareholders with dividends. So,I wouldn’t be surprised if the company has to raise additional money through equity to restructure its balance sheet in the future.
The bottom line
On an operational level, my opinion of Carnival and its share price has improved. However, from a financial perspective, this business remains troubled. And it will likely take multiple years to get fixed. All things considered, I think there are far better opportunities to be found elsewhere so I won’t be buying.