The Carnival share price dropped another 14% last week. Could it be an undervalued gem?

Jon Smith takes a look at the beaten down Carnival share price to try and see if the recent slump in shares is justified or not.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

With global financial markets seeing higher volatility than normal, some stocks are seeing their share prices slump. One example at the moment is Carnival (LSE:CCL). The Carnival share price dropped 14% last week, to close at 1,203p on Friday. This made it one of the worst performers over this period. With the shares also down 18% over a year, how low does the stock need to go before it becomes an undervalued buy for me?

Omicron stunting demand

It’s unsurprising that the Carnival share price performed badly last week given the latest Covid-19 news. The new strain, Omicron, is worrying the WHO along with governments around the world. From the first identification in Africa, cases have now been seen globally, including here in the UK.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

The domino effect is that travel restrictions are being tightened up with more tests now needed to travel abroad. This is bad for Carnival, as a global cruise line operator. Not only will people find it more difficult to take a cruise at the moment, but some are unlikely to even want to book such a trip.

Negative sentiment means that Carnival could see lower demand even for bookings that could be placed well in advance. At the moment, we don’t know what the picture will look like next summer, so committing to a cruise in this environment is a tough ask. I also need to remember that the broad target audience for Carnival is middle-aged and older. This set of clients is likely to be more cautious than younger travellers.

Carnival shares could continue to struggle

A the moment, Carnival shares are trading just above their low of the past year, a level seen in February (again when the outlook was bleak). If they go below 1,000p, then then they’d be on track to move below the lows seen in 2020, which in turn were the lows of the past decade.

So it’s clear that at 1,200p, the Carnival share price is low when looking at historical prices. But this doesn’t mean that it’s undervalued. The latest Q3 results showed that occupancy on its cruises was increasing. This went from 39% in June to 59% in August.

Yet even with eight of the nine cruise brands offering some kind of service, it’s still too early to gauge demand properly. This is because “many cruises, while generating positive cash flow, were limited to scenic cruises without ports of call, and generally priced well below the attractive destination-rich cruises we normally offer,” the company said.

So what I see here is a business that’s uncertain of demand, posting a quarterly net loss of $2bn. This is before the variant news hit! So personally I think the Carnival share price accurately reflects the current position that the business is in and isn’t undervalued.

There could be rich rewards for investors that have a high risk-tolerance. If Omicron is an over-reaction, and if demand for cruises rises sharply, the shares should rally. For me, this probability is too small right now, so I won’t be investing.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Jon Smith and The Motley Fool UK have 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

More on Investing Articles

Woman looking at a jar of pennies
Investing Articles

I think the JD Sports share price is a bargain. Here’s why

Our writer explains why the JD Sports share price has led him to buy more for his portfolio.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is this tech stock one of the best shares to buy now?

Jabran Khan is on the hunt for the best shares to buy now for his holdings and takes a closer…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

3 top FTSE 250 shares to buy right now

I think the FTSE 250 is offering some great dividend and growth shares at the moment. And there are plenty…

Read more »

Happy retired couple on a yacht
Investing Articles

This growth stock has seen its shares pull back! Should I buy now?

When a growth stock sees its share price drop, I look carefully to see if I could pick up a…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How to identify the best income shares like this one

Income shares vary in quality but this approach keeps me from making some of the worst howlers with dividend investing.

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

If I’d invested £1k in Tesla shares a year ago, here’s how much I’d have now

If Jon Smith had bought Tesla shares a year ago, he'd be in profit. But he has some concerns for…

Read more »

Twenty pound notes in back pocket of jeans
Investing Articles

Should I buy tobacco shares now for big dividends?

After a possible setback for electronic cigarettes, our writer explains why he would still buy tobacco shares for his income…

Read more »

a couple embrace in front of their new home
Investing Articles

3 FTSE shares I’m buying with the Help to Build scheme!

Last week, the government launched a new, Help to Build scheme. So, here are three FTSE shares that could benefit…

Read more »