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Why I’d sell Carnival shares today

Carnival (LSE: CCL) shares have suffered significantly in the coronavirus crisis.

The cruise operator has been one of the world’s worst-affected businesses by the pandemic. It has had to suspend all of its operations, but it is still liable for keeping its boats and crews in service. That means the firm is spending an estimated $1bn a month to cover costs. 

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The good news is that loyal customers seem to be willing to look past these short-term factors. The company has said that many customers who are planning to travel this year, have decided to rebook for 2021. But as the coronavirus crisis continues to rumble on, there’s no guarantee the business will be able to fulfil its promises to sail next year. 

As such, the outlook for the business is highly uncertain. 

Carnival shares under pressure

Even though they have recovered from their March low, Carnival shares remain around two-thirds below the level at which they started 2020. With this being the case, the stock appears to look cheap compared to its historical trading performance. 

However, a lot has changed at the company over the past six months. As noted above, the business has been spending around $1bn a month, maintaining its vessels even though they have not been allowed to sail. With no money coming in, the group has had to raise debt. Management has also issued new Carnival shares to raise funds.

The company had to pay investors a lot to raise this cash. The interest rate on its newly issued debt is close to 11%. This rate of interest suggests that Carnival is going to face higher costs for some time, and that may translate into lower profits and returns for shareholders. 

An even bigger problem facing Carnival shares right now is the fact that the coronavirus pandemic is showing no signs of slowing down. In fact, in many regions, the outbreak is only getting worse. As such, it could be months before the firm is allowed to re-start all of its cruises again. It has already suspended sailings until 2021 in some markets. 

A few months ago, Carnival said it had enough cash to last until the end of 2020 with no income. With its re-start date slipping further and further into the future, the company is getting uncomfortably close to this crunch point. 

Time to jump ship

Considering all of the above, I think it may be best for investors to sell Carnival shares. With each day that passes the company’s chances of survival are declining. Even if the cruise operator does survive the crisis, it may not be in a fit state to produce attractive shareholder returns for many years. If it takes on too much borrowing, Carnival shares may even collapse in the next few years. 

Therefore, avoiding the stock may be a sensible decision until there’s more clarity on its future growth potential. 

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Rupert Hargreaves owns no share mentioned. 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.