Cruise lines were dealt a heavy blow during the initial stages of the COVID-19 crisis. Investors walked the plank the moment that Carnival (NYSE:CCL) (NYSE:CUK) and smaller rivals Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line Holdings (NASDAQ:NCLH) shut down their passenger sailings in March. The ocean splashes weren't pretty.
Hungry for cash by early April, Carnival made some pretty desperate financing moves. It issued secure bonds yielding nearly 12% in this otherwise low interest rate environment. It also sold $500 million worth of stock at $8 a share. Those investors are feeling pretty good about now. The stock has more than doubled over the past five months, but are the gains warranted? Is Carnival really twice the company it was in early April? Let's take a closer look at the challenges and opportunities awaiting Carnival stock and its investors in the coming months.
Pieces of eight
Today's Carnival isn't theoretically any closer to sailing than the cruise line we knew back in early April. Carnival cancellations only stretched through May 10 at that time. We're now looking at a November restart at the earliest, and the market knows the drill by now. Every couple of days Carnival is putting out a press release delaying more of its sailings.
Carnival itself is also going to be smaller now than we thought back in April when it does get to business. It has disposed of or has plans to dispose of 18 of its more inefficient ships, accounting for 12% of its revenue this year.
Today's Carnival isn't all worse, but the rare areas of improvement have come at a price. In April we didn't know that Carnival, Royal Caribbean, and Norwegian Cruise Line would be spending the next several months with crew members stuck on their ships -- in a few cases perishing and initially without pay -- as they negotiated the repatriation process. The industry's crews are now back home, but one can imagine that turnover will be a bear when the time comes for them to come back to work.
Carnival is flush with greenery given the $8.2 billion in cash and equivalents it had on its balance sheet at the end of August, but that has come at the expense of a larger number of shares outstanding and a larger burden of interest expense in the future that will hold back its per-share profitability. And speaking of the bottom line, analysts thought Carnival would return to positive earnings next year. Wall Street isn't expecting Carnival to be back in the black until 2022 now at the earliest.
The world's largest cruise line operator has gotten better about holding on to its money. Its cash-burn rate has improved to a projected monthly average of $530 million in the current quarter, but -- again -- back in early April the assumption was that it would be back in business again by now.
An important positive note is that Carnival's liquidity makes its chances of survival a year from now a lot better than the vantage point from early April. There's a reason why creditors would only accept secured loans yielding nearly 12%. However, it's hard to be optimistic when the long-term viability of the industry is as murky as it was when the pandemic washed ashore. With Carnival's near-term prospects for growth shot and its return as a dividend stock at least two years away, it's hard to justify the industry's bounce from the initial pandemic-fueled sell-off lows.