Carnival (LSE: CCL) shares have been one of the biggest losers of the past 18 months. The company’s revenues plunged to near zero as the pandemic grounded the cruise industry last year. Investors did not waste any time jumping ship.
Since the beginning of 2020, the stock has plunged by nearly 70%, and since the beginning of 2018, the stock is off 80%.
But with the world slowly starting to move on from the worst of the pandemic, the outlook for Carnival is looking up. Over the next couple of years, the stock should begin to reflect the firm’s improving operating performance.
Recovery in progress
While the pandemic is still raging in many regions of the world, testing and vaccination programmes have helped most industries open up. That includes the cruise industry.
Carnival’s revenues totalled $546m, up 1,666% year-on-year for the quarter to the end of August. That is a far cry from the near $5bn a quarter in revenues the group reported before the crisis. But it is a start.
The company’s future depends on what course the pandemic takes over the next five years.
In the best-case scenario, the coronavirus will become less infectious, allowing the world to return to normal. However, in the worst case, the virus may continue to mutate into more infectious and damaging strains.
If it is the latter, I think Carnival will struggle to return to its former glory. There will likely continue to be a market for cruise holidays, but with strict testing and vaccination requirements. This could put a lot of consumers off.
I believe the most likely outcome is somewhere in the middle. The pandemic may continue to affect demand for cruise holidays in 2022 and 2023. But consumers should continue to return, although it will take some years for revenues to return to pre-pandemic levels.
The outlook for Carnival shares
The most important benchmark for Carnival will be a return to profit. Last quarter, the group reported a loss of $2.8bn on sales of $564m. These numbers suggest when sales return to around $3.5bn, the firm will be back in the black. Clearly, there is a long way to go before the company hits this target.
Nevertheless, if the group can hit this target in the next five years, I think the stock is worth at least book value. In theory, any corporation that is not losing money deserves to trade at or above book value. Carnival’s book value per share, according to the company’s latest figures, is 986p. This implies the stock looks expensive at current levels.
If Carnival can return to profit faster, the stock could be worth more than this target within half a decade. I think that is a big ask, especially considering all of the uncertainty surrounding the pandemic.
As such, I am not going to be buying the stock for my portfolio today. I think there is just too much uncertainty surrounding the outlook for the business.
