In light of the current pandemic and ensuing market crash, travel and tourism has suffered a major blow. Airlines are grounded throughout the UK and train services are reduced to a bare minimum. Add to that cruise companies have suspended operations since mid-March.
Carnival (LSE:CCL) is one such operator, with no actively operating cruise ships or indeed operations of any kind. The Florida-based company was recognised as top of the list of largest cruise lines, based on passengers carried annually and total number of ships in fleet.
Carnival’s share price has taken nothing short of a beating in the last three months or so. In fact, with a decline of approximately 75%, it is the worst-performing stock in the FTSE 100 during this market crash.
Its share price in January traded at close to 3,650p per share. Fast forward to March when the market hit bottom and the share price hit a lowly 620p per share. Some may be licking their lips at the opportunity to pick up cheap shares in a big international cruise line operator. I am not one of them.
Covid-19 and the market crash
It is estimated that Carnival’s costs run into the hundred of millions, somewhere between $500m and $1bn. With the suspension of operations set to remain until at least the end of June, there is clearly going to be significant impact to finances in the short to medium term.
In an update at the beginning of April, Carnival intimated that it cannot predict financial results right now. This is understandable as the extent of the impact of the market crash cannot be defined right now.
Carnival is battening down the hatches by securing over $6bn in funding through a combination of debt and equity. It also decided to fully draw down its $3bn revolving credit facility. It is cutting down on operating expenses where it can. Furthermore it has also decided to suspend dividend payments and share buybacks. These are steps many companies have taken recently to shore up liquidity.
Next steps
With all the financial uncertainty, I am very skeptical about Carnival’s viability right now. I do not feel they are at risk of going bankrupt on the back of this market crash. However, I do wonder what the cruise market look like post-Covid. Carnival has cancelled a series of scheduled sailings for 2020 and said it may struggle with bookings for 2021. I for one will not be looking at booking a cruise in the near future. The cruise market is very popular with over-65s. Will they possess the same appetite to book such holidays after this pandemic? I don’t think so.
I don’t want to ignore Carnival’s prominent position in the market as well as its past success. It has recorded year-on-year revenue growth for the past five years. In turn there has been an increase in dividend per share for the same period. I just think the next year or two will see hugely different results.
On that basis I feel Carnival is too risky to invest in. There are plenty of other market crash opportunities out there.
