The Carnival (LSE: CCL) share price has risen over 30% since the beginning of 2021. During the past 12 months the stock has been volatile but has increased by more than 80%. Of course, past performance is not an indication of future results.
I think the stock has soared on people’s hope of returning to some kind of normality after Covid-19. So far the vaccine rollout has been a success and lockdown restrictions are somewhat easing in the UK. But I’m not convinced about the long-term prospects for the Carnival share price. Here’s why.
Turbulent waters
It hasn’t been smooth sailing for the cruise operator. 2020 was a horrific year for Carnival. Revenue was hit due to travel restrictions but it still had to pay to maintain its ships. Even though the vessels didn’t leave port during the pandemic, they are still a fixed cost for the company.
Carnival’s average cash burn rate per month is approximately $500m. That’s a lot of money, especially when it’s not taking many customers on cruises. I think it’s also worth noting that this is after reducing costs to weather the coronavirus storm.
But I shouldn’t dismiss the great efforts the company has made to stay afloat during the pandemic.
Since March 2020, Carnival has raised almost $24bn in funding. It has taken on additional debt and issued $1bn in new stock in February. The company is also selling its less efficient ships to reduce its cost base. I think all these drastic measures have somewhat supported the Carnival share price.
Debt pile
While the cruise operator has been pulling out all the stops to stay afloat, I reckon it has tough times ahead. Carnival’s debt has been increasing and it doesn’t help when the company has to borrow itself out of trouble. In my opinion, it just adds more fuel to the fire.
At some point the liabilities will have to be paid off. What concerns me is that I don’t think Carnival is in a strong position to afford this level of debt. Hence I’m not comfortable with buying the stock just yet.
Momentum
I reckon there will be short-term momentum behind the Carnival share price. As my fellow Fool Edward Sheldon highlights, this is a ‘reopening’ stock. It should benefit from the easing of lockdown restrictions.
Its recent trading update revealed that the company has seen significant pent-up demand. In fact, booking volumes have accelerated and are up 90% in the first three months of 2021 versus the previous quarter. I think the increase in reservations is likely to continue, which should boost the Carnival share price in the short term.
The recovery
Let me be frank, the coronavirus crisis has left Carnival’s finances in a bad way. And it will take some time to recover. This could impact the stock.
The company does have a strong competitive position. But I reckon most of its recovery will depend on the easing of lockdown restrictions. For now, I’m holding fire on buying Carnival shares for my portfolio.
