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The Carnival share price is up 110% since the depths of the stock market crash. Here’s what I’d do now

International cruise line operator Carnival (LSE: CCL) saw its share price plummet by 81% in the depths of the stock market crash. Since bottoming out on 2 April, the shares have skyrocketed upwards by around 110%. However, it’s worth noting that they still sit around 67% down from the start of the year.

At first glance, these numbers may seem bewildering. But it’s important to recognise that a 50% loss requires a 100% gain in order to break even. Since Carnival lost approximately 80% of its value, its share price will have to gain by around 500% to reach pre-crash levels.

At face value, would-be investors may be concerned they missed the boat when it comes to buying Carnival shares. Nevertheless, these numbers demonstrate how far the share price still has to go, if it is to recover its pre-crash heights. With that in mind, could this be an opportunity for investors to realise some serious long-term gains by investing in the cruise ship operator today? 

Business woes

The outbreak of the coronavirus has had a huge impact on travel and tourism. This explains why the Carnival share price plummeted to such an extent. Holidays have been put on hold and until recently it was relatively uncertain as to when they would return.

The cruise company, which operates the P&O and Cunard lines, hasn’t seen any of its ships sail since March. Inevitably, this has had a massive impact on the business, causing the company to announce staff layoffs, salary reductions, and a suspension of its dividend.

With cruises not scheduled to go ahead until at least August, Carnival’s future is uncertain in the eyes of many. After all, no business can survive bleeding cash forever.

Looking ahead

However, it’s by no means a picture of complete doom and gloom for the company. Encouraging news came recently when the group announced that the majority of guests affected by schedule changes still want to sail in the future, with “fewer than 38% requesting refunds to date”.

What’s more, the world’s largest cruise operator has been taking every step to preserve and raise extra cash. Halting operations, suspending dividends, and furloughing staff has served to strengthen the group’s liquidity position. Carnival said that “These moves will contribute hundreds of millions of dollars in cash conservation on an annualised basis”.

Final verdict

Shares in the company currently trade at a price-to-earnings ratio of around 3.2. This reinforces the idea that at today’s price, there could be value to be had. Moreover, with positive signs arising from the tourist industry beginning to open up, it’s reasonable to assume that Carnival’s rally could continue.

Ultimately, if you can stomach the risk, investing in Carnival shares with a long-term mindset could deliver attractive returns. Resuming full operational capacity could be a catalyst that drives the company’s share price upwards towards pre-crash levels, handsomely rewarding investors who took the plunge.

However, if you remain sceptical about a swift return to cruise ships for holidaymakers and worry about Carnival’s long-term prospects, it may be best to sit this one out and look for investment opportunities elsewhere.

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Matthew Dumigan owns shares in 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.