The Covid pandemic crushed the cruise business. It caused Carnival (LSE: CCL) to slump to a loss of $10,253m in 2020. That’s from a profit of $3,276m a year ago. The Carnival share price crashed heavily too. But it started picking up in November. And so far in 2021, we’re looking at a year-to-date gain of 30%.
We’ve seen something similar from other companies in the holiday sector, such as International Consolidated Airlines Group (IAG). Its shares have followed pretty much the same trajectory, but are still a bit behind Carnival. Over the past two years, the Carnival share price is down 49%, but IAG has fallen 57%.
Despite being in a similar line of business, I view these two companies very differently from an investing perspective. Even before the 2020 stock market crash, I wouldn’t have invested in airline shares. The sector is just too fierce, competing almost entirely on price with little differentiation, and often being forced into razor thin margins.
In the cruise holiday business, by contrast, I don’t see anything like the same pressures. And I do see opportunities for good companies to do very well over the long term.
On that score, I’m a bit surprised the difference in the two share price performances hasn’t been wider. But then I also don’t really understand why investors are prepared to pay premium prices for airline shares even in the best of times.
But what would I do now? Despite the business’s horrible performance in 2020, I think the Carnival share price could be too low.
Getting back to business
Recent news from Carnival consists essentially of a stream of ‘sailings restarting’ updates. In the past few days we’ve heard that Princess Cruises plans to restart sailings from Los Angeles, San Francisco, and Ft Lauderdale in the autumn. Holland America is set to restart cruises to the Caribbean in the same timescale. And P&O Cruises has Mediterranean plans lined up for September, followed by Atlantic islands trips in October.
We’ll need to wait and see how this all transforms into a bottom line for the company. And with Carnival’s year ending in November, these new sailings will only just make it into the current year. But as sailings increase, and if the next set of figures look upbeat, I can see the Carnival share price continuing to rise as the year progresses. Of the IAG share price, I’m less optimistic.
Carnival share price pressures?
So what’s the downside? As fellow Motley Fool writer Rupert Hargreaves points out, the cruise business has a poor environmental record. And with increasing pressure on companies’ Environmental, Social and Governance (ESG) credentials, I think Carnival could suffer some backlash.
And then, even if the company can get back to 2019 levels of sailings, the effects of the crash won’t just disappear. In the 2020 year, long-term debt more than doubled to $22,130m. And by Q1 time this year, it was up further to $26,522m.
We should have a second quarter update on 24 June, and that will be the first thing I look for. On balance though, I still think we could see further Carnival share price recovery by the end of 2021. It’s on my shortlist.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.