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3 Reasons to Sell Carnival Corporation Stock

By Will Ebiefung – Oct 10, 2020 at 8:09AM

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Carnival's third-quarter earnings report reveals disturbing trends in the business.

Trading at just under $16 at the time of writing, Carnival Corporation (NYSE: CCL) is significantly below its 52-week high of $51.94. And while the stock might look like an affordable way to bet on a cruise industry recovery, its risks outweigh potential rewards right now. Here are three reasons to consider selling the stock. 

Cruise ship in dark waters.

Image Source: Getty Images.

1. The no-sail order could last into 2021

COVID-19 infections are resurging in many parts of the U.S. as states ease restrictions and normalize their economies. According to data from the CDC, America's daily infection rate is trending upward, with 53,000 new cases reported on Oct. 7. 

On Sept. 30, the CDC extended its no-sail order to Oct. 31. According to the New York Times, CDC Director Robert Redfield wanted to extend the restriction as late as Feb. 2021 before being stopped by the White House. While the government is kicking the can down the road with its cruising restrictions, Redfield's proposed February restart might give us the most accurate picture of when cruising will actually resume, considering the growing number of infections in the county.

As per the CDC website, the CDC director can extend the no-sail order based on public health considerations. The White House is also in favor of potentially extending the no-sail order on a month-by-month basis if needed. 

2. Carnival is burning through cash

The uncertainty from the CDC creates a risky environment for Carnival, because the company faces massive cash burn while its operations remain stuck in port. 

Carnival's third-quarter revenue tanked 99.5% from $6.53 billion to $31 million after recording zero passenger ticket revenue. While management slashed operating costs and expenses by almost half, the company generated a net loss of $2.86 billion, including a $910 million non-cash impairment charge as it wrote down the value of some of its ships. 

Carnival expects to burn through approximately $530 million in cash per month in the fourth quarter, along with $1 billion in maturing debt and $130 million in newbuild ship obligations due in the period. While Carnival's $8.17 billion cash position can stave off bankruptcy until cruising resumes, investors should expect the company's balance sheet to continue deteriorating as long as the CDC's no-sail order remains in place. 

3. Carnival is sinking under a mountain of debt

The good news is that Carnival's passenger volume is poised for a quick rebound when the CDC lifts its no-sail order. Advanced bookings for the second half of 2021 are at the higher end of their historic range, similar to where they were in 2018. But even when Carnival's passenger ticket revenue recovers, the company may face lower profit margins and cash flow challenges because of interest expense and debt maturities. 

Carnival has raised $12.5 billion in debt since March, bringing its total long-term debt to $18.92 billion. The leverage is already hurting the company's bottom line. 

Interest expense surged 496% year over year, from $52 million to $310 million in the third quarter. This is up from $182 million in the second quarter. And if the trend continues, Carnival could find itself with an interest expense of over $1 billion annually -- to put things into perspective, that would be equal to roughly one-third of 2019 profits. Debt maturities will be another challenge. As mentioned earlier, the company plans to retire $1 billion in the fourth quarter. This will be followed by a total of $10.93 billion in maturities between 2021 and 2023. 

Caught between a rock and a hard place

Cheap stocks can be tempting, especially when they trade at a fraction of their former market caps. But Carnival's low share price isn't an opportunity -- it's a reflection of the massive challenges the company will face going forward, even after cruising resumes. That's why investors should consider selling Carnival stock before it sinks their portfolio.

 

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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