The Motley Fool

The Carnival share price is up 70%. Is it time to buy?

Image source: Getty Images.

Carnival (LSE: CCL) is the world’s largest cruise ship operator, owning brands such as Holland America, P&O Cruises and Princess Cruises. The Carnival share price is down by more than 70% so far this year, making it the biggest faller in the FTSE 100.

However, back in the grim days of March, Carnival shares hit a low of 581p. Since then, the stock has risen by about 70% to nearly 1,000p. The company has raised about $6.5bn from investors to meet immediate costs, and is benefiting from improved market sentiment. Is it time to buy Carnival shares?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Two big questions

Last week, Carnival said it would extend the closure of its entire cruise business to 1 August. In August, eight of the group’s 105 ships will restart operations from three US ports. All other sailings will be cancelled until at least 31 August.

The decision will mean many more cancelled bookings. And further cancellations could still be required if Covid-19 travel restrictions remain in force for longer than expected.

Carnival hopes it can persuade travellers to reschedule their trips rather than receive a cash refund, but I’d guess some travellers will prefer to receive cash. This highlights the two big questions facing the firm.

How soon will travellers be happy to return to cruise ships? And can the group continue to cover its cash outgoings without needing a full refinancing, which could cause Carnival’s share price to crash once again?

I’m sitting tight

I’d love to say I bought Carnival shares when the stock was trading under 600p. But the reality is that, like most shareholders, I paid much higher prices for my stock. My holding is deep underwater at the moment. I don’t expect any dividends for a couple of years either.

Despite this, I don’t plan to sell. In my view, Carnival’s business is likely to return (mostly) to normal over the next couple of years. As the world’s largest operator, it enjoys economies of scale and huge marketing reach. It’s also highly geographically diversified.

The company expects to report a thumping loss this year. But I think shareholders can take some comfort from the firm’s low valuation. The latest accounts show ships and property valued at $38bn. At a share price of around 1,000p, Carnival stock is trading at roughly half my estimated net asset value of c.2,000p per share.

The Carnival share price could collapse again

In my mind, the big risk with Carnival shares relates to debt. I’m sure the business will recover, but I’m not sure if management will be able to do this without a more comprehensive refinancing.

This could take several forms. One option would be a rights issue, where existing shareholders can buy new shares in the business. The problem with this is that Carnival’s market-cap of about £7bn is significantly lower than its borrowings, which I estimate at over £13bn. This means a lot of new shares would be needed to make a dent in the debt. Investors might struggle to support this.

The other option is that the group’s lenders will write off some of its debt in exchange for new shares. This could leave existing shareholders with a much smaller part of the business, and big losses.

I see Carnival shares as a buy, but they’re not without risk.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of Carnival. The Motley Fool UK has recommended Carnival. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.