The cruise industry is one of the most controversial "recovery sector" plays in the market. Though cruising has been an increasingly popular activity over the past two decades, it has also been one of the hardest hit by the coronavirus pandemic.

At the onset of the pandemic, the whole industry raised billions through both debt and equity raises, even as cruising activity, and therefore revenue, went to zero. But as September has rolled around, we're beginning to see the first baby steps toward cruising in certain regions.

The biggest cruise line in the world, Carnival Cruises (NYSE:CCL) (NYSE:CUK), restarted some of its smaller cruise lines this month, while also giving a business update, showing a variety of moves to both restart its operations and also extend its timeline for survival. But that doesn't necessarily mean Carnival is a buy today.

A pair of hands holds a railing on a cruise ship as the sun sets behind it.

Image source: Getty Images.

The bad: Ugly headline numbers and more dilution to come

On Sept. 15, Carnival gave a quick update on its third-quarter financials for the quarter ended Aug. 31, a time when no ships were sailing.

The headline numbers were predictably bad. Carnival lost a whopping $2.9 billion on a net income basis under generally accepted accounting principles (GAAP), although adjusted for ship impairments and other one-time expenses, the loss was only $1.7 billion. However, the company also burned an average of $770 million per month, or a little over $2.3 billion in the quarter.

Although the $770 million monthly cash burn figure was somewhat scary, Carnival also expects that to come down to $530 million in the fourth quarter. Given the company's $8.2 billion cash on hand, Carnival should have enough cash to last more than 15 months.

However, Carnival also has $2.1 billion in debt maturities coming due through the end of 2021. Given the sky-high interest rates at which it would have to refinance, Carnival is looking to raise more capital in the form of equity issuances, which would dilute shareholders. In conjunction with the earnings release, Carnival announced a shelf offering to sell up to another $1 billion in stock at market prices. Given that Carnival is racking up debt and issued stock at just $8 in early April versus a $15.30 share price today, it seems like a prudent move, even if shareholders are diluted in the process.

In addition to the equity raise, Carnival will dispose of older, less efficient ships to raise additional cash. The company now plans to sell or dispose of 18 of its less efficient ships, up from 13 as of the recent conference call with analysts. The additional ship sales and disposals will account for 12% of the company's prior capacity, but only represented around 3% of 2019 operating income. Therefore, by getting rid of the ships, Carnival will reduce its debt by a greater percentage than its operating income will go down. It will also bring down debt without the company having to raise new equity. 

Setting sail again

While Carnival seems set to survive until the arrival of a vaccine, Sept. 6 also brought the restart of its Costa cruise line, which successfully completed a cruise to five locations in Italy. Carnival will also be restarting its AIDA cruises in the western Mediterranean and the Canary Islands. It's hard to know exactly how profitable these small cruises will be given enhanced safety protocols and likely less-full ships, but to see even small cruise activity after such a long period of inactivity is encouraging.

Unfortunately, Carnival also saw setbacks in other regions. The Australian and New Zealand governments recently extended the suspension of cruise tourism in the country, and the United Kingdom is contemplating increasing restrictions after a resurgent wave of coronavirus cases there.

A balanced risk-reward here

Investors in Carnival stock may be hoping for a resurgent stock if and when a vaccine arrives, but a lot of permanent damage has already been done, and I don't believe we'll see a return to pre-pandemic highs for many years. The company has issued an awful lot of debt at high interest rates and stock at low prices.

Though the company made $3 billion in net income in 2019 against a market capitalization today of just $13.5 billion, or 4.5 times 2019 earnings, since the company will have fewer ships, a higher debt load, and more shares outstanding, that's not indicative of the company's earnings power when it gets back to "normal."

As such, even at a cheap-looking valuation, Carnival and all of the other cruise lines look like they're balanced in terms of risk and reward today.