Murky waters

Pre-pandemic, the travel cruise industry was a rather lucrative one to invest in. The top cruise companies enjoyed profit margins of over 10%, and an ever growing market. Consequently, Carnival enjoyed consistent top and bottom line growth throughout the years.

Then came the pandemic, which nearly destroyed the entire cruise ship industry, as passenger numbers plummeted to levels not seen since 2000. Nonetheless, a sharp rebound in 2021 seemed to indicate that travel may be returning with a bang. Even so, a great deal of uncertainty still lies ahead for Carnival.

Is Carnival getting started?

At the end of last week, management announced its plans to release its Q2 earnings later this week. As such, future bookings will be one of the most important metrics I’ll be paying attention to. The majority of Carnival passengers travel to and from the United States. I’m expecting a decent figure, after the US lifted testing requirements last week.

If a stronger than expected bookings number is reported, I envision the Carnival share price to rebound. On the flip side, a much weaker than expected number could be the nail in the coffin for the FTSE 250 firm. Nevertheless, Carnival shares are up 8% on Monday as investors gear up for the much anticipated report.

That being said, although Covid variants have taken a backseat, another mutation could send the travel industry into another decline. Additionally, persistent economic headwinds are expected to hinder passenger growth in the coming quarters. High oil prices, roaring inflation, and ever increasing interest rates have consumer sentiment pointing towards a recession. These worries were echoed recently by a Morgan Stanley analyst who predicts lacklustre sales for the cruise ship company.

A sinking ship?

Despite the potential upbeat numbers, there’s one thing I can’t ignore about Carnival, and that’s its soaring levels of debt. The company only has $7bn in cash and equivalents, and almost $36bn of debt to repay. While its near-term repayments aren’t too hefty, the figure only gets exponentially higher from here on out.

With the increasing amount of repayments, the firm will have to hope that the industry rebounds sharply and quickly to generate enough cash. Otherwise, I foresee the board issuing stock to raise cash, thus sending the Carnival share price even lower. The alternative would be to refinance its debt, but doing so risks taking on higher interest rates, and a higher total repayment value.

If historic demands returns, Carnival shares may just make one of the biggest comebacks. However, that remains a slim possibility given the current economic landscape. Not to mention, a Bloomburg analyst even red flagged Carnival’s ability to meet repayments. Therefore, I’m doubtful that the Carnival share price can recover from these levels for the foreseeable future. So, I won’t be investing in Carnival shares. Instead, I’ll be investing in other growth stocks that have better financials.

The post Can the Carnival share price recover from an all-time-low? appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned at the time of writing. 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.

Having been a holder of the stock at the beginning of the pandemic (and suffered), is it now time for me to take a fresh look at FTSE 100 company?

Carnival shares: what’s the draw?

While I did decide to jettison my holding last year, I do still think there’s a lot to like about Carnival. 

For one, it’s the clear market leader at what it does (at least, when its liners are actually permitted to move). The owner and operator of more than 100 ships, Carnival’s portfolio includes brands such as Princess Cruises, Cunard, and P&O.

In the good ol’ pre-pandemic days, it was a hugely profitable business, helped by the fact that guests couldn’t escape when at sea. Over lengthy trips, that can really boost margins.

The long-term (and I really mean long-term) outlook for the industry also looks to be positive. As things stand, US travellers are by far the most frequent cruisers. That could change over the next few decades as demand from other parts of the world grows. Asian markets could prove particularly lucrative for companies like Carnival due to growing levels of affluence among the middle class. As well as serving far-more-active retirees, there’s also a possibility that taking a cruise may become increasingly popular with younger customers.

Once bitten…

Despite all this, I still think there are many issues with the investment case for Carnival.

The balance sheet is under massive pressure. In fact, the amount of net debt is now higher than the company’s entire market capitalisation! This is no real surprise, of course. Huge cruise-liners cost bucketloads of cash to maintain whether they’re permitted to move or not. I was prepared to overlook this when I picked up the stock a few years ago. That worked out well… 

Having made it this far, I’m confident management be able to steady the ship through financial jugglery until trading bounces back. Unfortunately, any hope of dividends looks dead in the water. As someone who originally bought Carnival shares primarily for income, that’s a problem for me.

And this is the rosy scenario. Yes, infection rates are going in the right direction, at least as far as the UK is concerned. However, vaccination programmes are clearly progressing at different rates around the globe. This could halt some Carnival cruises for a while as well as causing potential customers to think twice before booking. Pent-up demand is one thing but I can’t be the only one that remembers the ‘floating petri-dish’ headlines of 2020. 

A safer option?

Buying Carnival shares now may prove to be a bargain in a few years. However, my sea legs aren’t yet strong enough to deal with the potential for ongoing volatility. Yes, the shares are up a very healthy 65% in the last year. However, performance over the last month hasn’t been quite so stellar.

This makes me wonder if quite a bit of the recovery has now been priced in and whether the shares could drift for a while. 

All told, I feel far safer playing the rebound in travel via this UK growth stock.  

The post Carnival shares: can this news tempt me back on board this FTSE 100 stock? appeared first on The Motley Fool UK.

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Paul Summers 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.

Having uncharacteristically sold my position for fear that Carnival’s very existence was under threat, I vowed never to return. Will I live to regret this? Perhaps. Let’s look at why the shares might be about to rally hard.

Why might the Carnival share price rally?

There are a few reasons. Perhaps the biggest of these is that vaccination programmes seem to be going swimmingly. The huge fall seen in infection rates in the UK is undeniably positive and should mean domestic cruises can technically restart from 17 May as planned.

Naturally, it may take a while longer for Carnival to kickstart its operations. However, the demand seems to be there. Earlier this month, the FTSE 100 member revealed forward bookings had been better than expected. In fact, volumes of all future cruises were roughly 90% up compared to the previous quarter. That’s despite the company doing very little advertising or marketing.

In response to this news, broker Peel Hunt elected to increase its target for the Carnival share price from 1,850p to 2,100p. Assuming this comes to pass, that would give me a gain of 26% if I bought today. That’s hardly shabby for such a big company. 

Too optimistic?

However, not everyone agrees. Investment bank Berenberg raised its target price to 1,400p (lower than where it is now) but still rated the stock as a ‘sell’. Analyst Stuart Gordon added that the recovery was already priced in, based on a “blue-sky scenario” of everything going to plan. I’m inclined to agree. 

While I now expect the company to recover in time, I simply can’t get past the fact Carnival is now swimming in even more debt than it already was. This situation won’t be helped by rising fuel costs and the need to spend to comply with new health regulations. 

Investors also need to reflect on just how good trading needs to be to bring the Carnival share price back to pre-coronavirus levels. As things stand, it’s still almost 50% below where it was. Is consumer confidence now so high that this gap will be closed at a rate of knots? I’m not so sure. Nor am I sure that people will prioritise spending with Carnival over all the other land-based things they could be doing with their new-found freedom. 

A final drawback from investing in Carnival now is that investors aren’t currently being paid for their patience in the form of dividends. For me, this income stream was one of the major attractions of the company. The idea being that Carnival could help balance out the risk from more growth-focused stocks elsewhere in my portfolio. That turned out well. 

Once bitten…

My experience with this FTSE 100 giant wasn’t a pleasant one. As such, I’m not sure I’d be willing to risk my cash again. The Carnival share price may well rally hard over the rest of 2021, but I remain convinced there are safer ways of making money elsewhere in the FTSE 100. 

The post Is the Carnival share price set to soar? appeared first on The Motley Fool UK.

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Paul Summers 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.

Step forward Carnival (LSE: CCL).

Sinking FTSE 100 stock

Now, you don’t need me to tell you that 2020 hasn’t been kind to the cruise operator. The arrival of the coronavirus decimated the industry as ships were quickly renamed ‘floating Petri dishes’ and passengers struggled to make it back to dry land before travel bans and lockdowns were enforced. 

Naturally, Carnival’s share price sank like a stone. By mid-March, the FTSE 100 stock was more than 80% down on where it stood at the beginning of January. That’s the sort of drop you’d expect from high-risk penny picks, not an established top-tier tanker.

Unfortunately, the speed and severity of the coronavirus took me and, no doubt, many other investors by surprise. To make matter worse, I did nothing. 

Wait a minute!

At this point, you might be wondering why I should be so bothered. After all, a truly Foolish investor buys shares with the intention of holding them for years. We’re business owners, not share price speculators.

Even so, as a shareholder, it’s vital to realise when an investment case has changed so much that a full recovery will take a very long time. For me, this was when Carnival was forced to go cap-in-hand to investors and raise an obscene amount of cash over the summer. 

One must also consider the opportunity cost of not moving on. Other FTSE 100 stocks have done brilliantly since March’s market crash. Further down the market spectrum, some shares have surely made millionaires of early private investors.

So, I pulled my head out of the sand and took the loss. Belatedly.

Looking ahead

Would I be tempted to re-buy Carnival now that vaccines have been discovered and distributed? I don’t think so. While I remain positive on the cruise industry over the very long term (the growth opportunities in markets such as China are immense), the sheer amount of debt Carnival now has is very unappealing.

The possibility of legal action being taken against the company by disgruntled passengers can’t be ruled out either.

This all makes it unlikely the FTSE 100 company will pay dividends to holders before bookings fully recover. The latter could take many years. Even if it does reinstate cash returns, these will probably be very small. This is problematic since Carnival’s dividend stream was one of my main reasons for investing in the first place. 

While sentiment should improve as global travel normalises in 2021 (we hope!), I also wonder if, after riding an initial wave of optimism, the £12bn-cap’s share price could quickly lose momentum. 

Count my blessings

Thankfully, the rest of my portfolio has made up for my loss on Carnival, and then some. What’s more, I thankfully refrained from throwing good money after bad.

Again, ending on a philosophical note, my time with Carnival has reinforced the idea that occasional losses are inevitable. It’s just part of the process of becoming a better active investor.

Hopefully, I’ll avoid another such loss in 2021.  

The post Forget my winners. This FTSE 100 stock is my WORST investing mistake of 2020! appeared first on The Motley Fool UK.

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Paul Summers 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.

Why did the Carnival share price initially sink?

It’s been a tough year for shareholders of the cruise line operator. With safety concerns for its passengers, the firm is following the guidance of the Centers for Disease Control and Prevention (CDC). Subsequently, all cruise trips have been suspended with the earliest restart date expected to come in January 2021.

These cancellations and customer refunds have wreaked havoc on the financial health of the company. Even though their cruise ships remained parked in harbours, the costs of maintaining them haven’t changed. 

The high operational costs of the business created high barriers to entry for competitors. However, this competitive advantage has turned into a serious liability over the past year. 

Debt levels are rising!

To remain afloat (pardon the pun) Carnival has been taking on additional debt as well as issuing new shares through equity offerings.

As of August, total debt stood at $18.9bn after it successfully acquired approximately $9.2bn of additional funding through credit facilities, secured notes, and convertible notes. While it is undoubtedly good news that Carnival secured additional financing, it does raise concerns.

As part of these agreements, certain limitations are in place that restrict how much of the capital structure can consist of debt. Specifically, the firm must maintain a minimum debt service coverage – EBITDA-to-interest – of three-to-one. Put simply, the company must be making sufficient profits to cover three times its interest payments to debt holders.

With the business nearing that ratio due to the lack of sales, its ability to continue relying on debt financing is quickly diminishing. 

While most of this new debt does not need to be repaid until after 2024, its existing obligations are coming due and may drastically affect the Carnival share price.

Is the Carnival share price a bargain or a trap?

Assuming the company can keep up with interest payments and operations return to normal soon, then the current share price does look quite appealing in my eyes.

But there is a high level of risk. Suppose the worst case comes to pass and the firm declares bankruptcy. In that case, shareholders are would experience losses, even at the current low share price.

There is currently $50bn in assets on the balance sheet, $37bn of which is in the form of cruise ships. These can probably only be liquidated at an average of 40% of their reported value. Of the remaining $27.8bn, $19bn will be used to repay debts, which leaves a rough estimate of $8.8bn available to equity holders. When compared to the current Carnival share price — or $15bn market cap — shareholders are likely to experience a 46% decline in value, almost everything that was gained these past weeks.

The post The Carnival share price has rebounded 40%! Should I buy now? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in Carnival. 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.

Tighter restrictions mean that pubs will now close in the highest-risk areas. Nobody knows how long these restrictions will last. Likewise, with Covid cases escalating rapidly in most of Europe, companies that rely on travel look set for a prolonged bout of misery. There are now very few places abroad that UK citizens can travel to freely.

While this undoubtedly affects a great many companies, Wetherspoon and Carnival could be impacted immediately. If I held either of these two FTSE 250 shares, I reckon I’d sell out now and invest in something that would help me sleep a bit better at night.

Last orders

Wetherspoon was quick to reopen after the initial lockdown closed all of its pubs back in March. By the end of August, more than 95% of its pubs had reopened. But not even Rishi Sunak’s Eat Out to Help Out scheme was enough to maintain revenues at last year’s levels. From the beginning of July to mid-August, like-for-like sales were 17% below the prior year.

Following lengthy pub closures and the erosion of profit margins, the company expects to make a loss for this year. That’s not exactly surprising. But Wetherspoon’s shares still look overpriced, in my opinion. The shares trade at 16 times last year’s earnings, a period that was unaffected by Covid. That wouldn’t be cheap in a normal year. New restrictions mean the group will remain unprofitable for longer and will take longer to recover. In my mind, that’s still not reflected in the Wetherspoon share price.

Carnival shares have further to sink

Carnival has been more affected by Covid than most, with its cruise business effectively shut down for six months. Only in the last month has the company resumed a very small number of its cruises. This is reflected in its financial performance. In the nine months to the end of August, the group made a whopping net loss of over £6bn, with revenue down 67% from the year before.

A deteriorating Covid outlook has forced the group to cancel the majority of its cruises until next spring. It still has £6bn in cash, but a monthly cash burn of over £500m means that might not last long. What’s more, the group has borrowed so much just to survive the next year that repayments are going to eat into profits for the foreseeable future. It owes £5bn in repayments in 2023 alone. The Carnival share price has already fallen over 70% this year, but I think it’s got further to fall yet.

Holding Wetherspoon or Carnival shares isn’t just about whether the companies will survive the next year or two. It’s also about what the travel and hospitality sectors will look like in a few year’s time. I have no doubt that the hospitality sector will eventually recover. But I do have doubts about what the cruise industry will look like in the future. For a good night’s sleep, I think it’s best to sell shares in these companies now. There are so many better companies to invest in.

The post JD Wetherspoon and Carnival shares: is now the time to buy ahead of a second lockdown? appeared first on The Motley Fool UK.

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Thomas has no position in any of the shares 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.

So, which of these battered top-tier stocks, if any, is the best buy right now?

FTSE 100 bargains?

A lack of earnings guidance makes applying traditional valuation methods tricky at best, and redundant at worst. There’s also no need to discuss dividends, since all of the above have shelved payouts. With this being the case, we need to adopt a more qualitative approach. 

Strengths include all three being established heavyweights. In a sector that could see multiple smaller operators go out of business, this should ultimately mean less competition. All three FTSE 100 constituents have also been proactive in reducing costs (although, sadly, it looks inevitable the some furloughed workers will eventually have their jobs cut).  

On the flip side, all still have sizeable fixed costs they can’t avoid, such as ongoing maintenance of their assets. They also have significant amounts of debt on their balance sheets. 

Keep your distance!

Grounding planes and the like will only get you so far, of course. The ability of the three companies to recover rests on several things beyond their control.

Chief among these is whether there’s a second wave of the virus. If there is, how bad might it be? Since we don’t yet know, I don’t think it’s worth contemplating this scenario for long. Simply expect another massive hit to their respective share prices if it comes to pass. If the possibility of that scares you, steer clear!

Let’s assume, instead, that a big second wave is avoided but protective measures are still enforced.

Should this come about, I suspect IAG may struggle. The compulsory wearing of masks makes more sense than separating passengers by seats but will likely make for a fairly unpleasant experience. The number of customers on a ship may be far greater than a single flight, but Carnival would surely be able to adopt social distancing measures with greater ease.

TUI is perhaps the most problematic of this FTSE 100 bunch since it owns cruise lines, airlines, and a hotel portfolio. The firm also faces growing competition for bookings from nimbler rivals, such as On the Beach.

On the flip side, this diversification could become a buffer for TUI in the better-than-expected scenario since it’s not wholly dependent on one earnings steam. 

And the winner is…

Forget logistical barriers, it’s the psychological wounds inflicted by the coronavirus that could have the greatest lasting impact. As such, I still think it takes courage to buy any of these FTSE 100 stocks right now. This is despite recent rallies suggesting the worst might be over.

Notwithstanding this, I think the cruise line operator just about edges this three-way battle. While undoubtedly biased (I hold), it dominates its industry in a way IAG and TUI can only dream of doing. A 45% market share is about as good as you’ll ever get in the cut-throat travel industry.

Factor in higher operating margins, increasingly active retirees in the West along with growth opportunities in the East and I’d argue the business is the best FTSE 100 ‘bargain’ buy here.

The post FTSE 100 bargain buy: Carnival, IAG or TUI shares? appeared first on The Motley Fool UK.

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Paul Summers owns shares of Carnival. The Motley Fool UK has recommended Carnival and On The Beach. 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.

The Carnival (LSE: CCL) share price is down in the dumps. It started 2019 trading at around 3,650p. Today, you can buy it for 970p, a drop of three quarters. Some may have expected it to fall even further. So has the panic been overdone?

Last week, management at the FTSE 100 company, which also owns Cunard, P&O, and Costa cruise brands, announced pay cuts and job losses aimed at saving “hundreds of millions of dollars” over the next year or so. Cost savings are essential, given that the company has generated “no meaningful revenue” since the crisis struck.

FTSE 100 stock in troubled waters

Some have suggested the pandemic could shrink the cruise industry for good. Many of the industry’s critics would rather like that. Will it happen or can the Carnival share price recover?

Longstanding cruise customers are showing signs of resilience. Carnival reports that 38% have asked for refunds following cancellations, with the majority choosing to sail at a later date. We will know more from August, when Carnival plans to get eight of its ships out there again, although only in North America.

Demand might be stronger than you think. Operators are already reporting strong bookings for 2021. Many are attracted by big discounts. Others feel safe booking having been told they can reschedule, or cancel, without fear of penalties. The Carnival share price could benefit.

The demand seems to be coming from regular cruise travellers who know and trust their operators. They’re calculating that cruise operators will be working harder than ever to uphold hygiene and social distancing. However, the company still faces tough questions on how the coronavirus spread on three of its ships.

The Carnival share price is temptingly low

Carnival is the only stock listed both in the US and UK, but isn’t banking on a bailout from either government. It’s issued enough debt and equity to continue operating in the current environment until November. As Coronavirus pandemic shows signs of receding, it could just make it.

You would still have to be supremely brave to buy the Carnival share price, even at today’s low valuation. I think the big threat is we get a second wave of the pandemic when autumn comes. That could shake sentiment.

On the other hand, the cruise industry should be ready for it this time. If it avoids a major outbreak, the Carnival share price could prove surprisingly buoyant.

However, it’s still too big a risk for me right now. I believe there are far more exciting stocks to buy today.

The post Is the Carnival share price the biggest bargain on the FTSE 100 today? appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares 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.

After that kind of spectacular collapse, you might be wondering whether Carnival shares are now a bargain. So, let’s take a look at the investment case.

Near-term losses

The first issue to address is near-term profits. Since mid-March, all major cruise lines have suspended their operations. And Carnival has advised its suspension will last until at least 27 June.

Given that the company is burning through between $500m and $1bn per month in costs, it’s pretty clear the disruption is going to result in a significant financial hit in the short term.

On 6 April, Carnival said it cannot estimate the impact on its near- or longer-term financial results. However, it also advised it expects a net loss on both a US GAAP and adjusted basis this financial year.

So, it’s fair to say there’s substantial short-term financial uncertainty here.

Carnival shares: can the company survive?

Having said that, it doesn’t look like Carnival is at risk of going bust in the immediate future. The company has avoided an immediate collapse by securing $6.25bn of fresh funding through a combination of debt and equity. It also recently fully drew down its $3bn multi-currency revolving credit facility.

In addition, the group has taken action to bolster its liquidity. For example, it has made capital expenditure and operating expense reductions. It has also suspended its dividend and share buyback scheme.

Overall, this cash infusion and cost reductions should give Carnival some breathing space in the short term. According to the company’s 3 April update, it has sufficient liquidity to satisfy its obligations, and remain in compliance with its existing debt covenants for the next 12 months.

However, it also said it cannot assure investors its assumptions used to estimate the liquidity required are correct, as it has never previously experienced a complete cessation of its cruising operations.

Medium-term outlook

Another issue to consider is how the business will perform when operations do kick in again. Will people still want to book cruises later this year, or in 2021, knowing how contagious and dangerous Covid-19 is?

Carnival CEO Arnold Donald recently said cruise bookings for 2021 are “strong.” However, I’m not convinced. I certainly wouldn’t book a cruise right now. At present, it feels risky just going to the supermarket. 

Are over-65s going to book cruises in the same way they have in the past? I’m really not sure. I may be wrong but, in my view, getting back to ‘normal’ could take a long time.

Add in the fact that the company is facing a reputational blow for allegedly ignoring the dangers of Covid-19, and the medium-term outlook for Carnival shares doesn’t look great, in my view.  

Are Carnival shares worth buying?

All things considered, I think Carnival shares are too risky right now. There’s a chance the stock could rebound if news improves. However, overall, the risk/reward proposition doesn’t look so favourable, in my opinion.

Ultimately, I think there are more attractive investment opportunities today.

The post Carnival’s share price has fallen 75% in 3 months. Is now the time to buy? appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares 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.

Today, the Cineworld Group (LSE: CINE) share price is up an incredible 46%, as investor sentiment surges on signs the European outbreak may be slowing, encouraging people to take a punt on riskier stocks. The Cineworld share price isn’t the only dramatic climber, FTSE 100-listed cruise operator Carnival (LSE: CCL) is up 26%.

As the stock market crash turns into a potential recovery, would Warren Buffett open his wallet for these two?

Cineworld share price is so cheap

It’s been a good week for the FTSE 100, which has risen sharply for two consecutive days to over 5,700 at time of writing, up 15% since dipping below 5,000 on 23 March.

In the short run, the index could go anywhere from here. It could fall 1,000 points, or rise 1,000 points, nobody knows. I don’t, you don’t, and neither does Warren Buffett, who believes timing the market is both futile and dangerous. “I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good,” the Sage of Omaha has said.

Bargain FTSE stock fails the Warren Buffett test

Investors seem to be rushing to get a piece of the Cineworld share price and Carnival share price today because they think Covid-19 is on the run, and shares hit hardest in the stock market crash are likely to rebound fastest.

FTSE 250-listed Cineworld has crashed as social distancing regulations killed off the cinema visit. It is trading 86% lower than this time last year, with a crazy low valuation of just 1.78 times earnings. That’s a bargain FTSE stock by conventional metrics, but a different matter in today’s unprecedented situation.

Cineworld’s problems pre-date the crisis, as it is loaded with $4bn of net debt, following last year’s highly leveraged acquisition of Regal Entertainment, and faces stiff competition from streaming services such as an Netflix, Amazon Prime, HBO and next up, Disney. Warren Buffett likes a company with a competitive moat, but Cineworld has serious challengers.

Carnival share price scares me

Carnival also worries me, because frankly who would want to book a cruise right now? I don’t even want to go to the supermarket. Especially since further coronavirus outbreaks are likely. Carnival stock stock is down 81% measured over a year, and trades at just 2.02 times earnings.

The group has raised nearly $6bn in net debt to see it through the stock market crash. But we don’t know how long the current troubles will last. Warren Buffett loves it when a “great company gets into temporary trouble”, but Cineworld’s and Carnival’s troubles seem far from temporary to me.

The post This bargain FTSE stock is up nearly 50% today! Would Warren Buffett buy it? appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares 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.