At some point, we can imagine that cruising -- the vacation loved by so many -- will resume, and revenue of cruise giants like Carnival (CCL 0.11%) (CUK) will rebound. The coronavirus outbreak forced Carnival and other cruise companies to halt sailings earlier this year. As a result, the company swung to a loss and its shares dropped. Carnival stock is down 73% so far this year.
The idea of a rebound might make Carnival's current share price of about $14 look tempting. Is it time to take the plunge? I say, "not so fast." Investing in this stock now could torpedo your portfolio. Let's take a closer look at the situation.
Carnival and other cruise companies are currently under a "no-sail order" from the Centers for Disease Control and Prevention (CDC). That order, already extended three times, prohibits the sailing of cruise ships in U.S. waters. It's set to expire on Oct. 31. With the number of coronavirus infections rising in the U.S., it wouldn't be surprising if the CDC decided to extend the order again. After declines in August, the number of infections resumed its march higher in September, according to CDC data. In the past seven days, more than 492,000 new cases were confirmed in the U.S., and the total number of U.S. cases has surpassed 8.6 million.
Even if the CDC doesn't extend the no-sail order, it's clear the public health institute isn't encouraging cruise vacations. Last week, the CDC increased cruise ship travel to a "Warning Level 3." That means the CDC recommends that travelers postpone cruise travel worldwide. The State Department also advised U.S. citizens to avoid cruise travel. Travel health warnings are typically applied to travel in specific countries -- not for means of transport. The State Department made an exception here, citing the "increased risk" of COVID-19 transmission on cruises.
Two lines cruising
Against this grim backdrop, Carnival has made some progress from late March, when sailings were at a complete standstill. The company's Costa line resumed operations with the cruising of two ships in Italy in September, and AIDA cruises resumed in Italy in October.
Carnival plans to eliminate 18 of its ships to gain operating expense efficiencies. Those ships represented only 3% of operating income last year. Carnival said its liquidity efforts mean it has enough to meet obligations for at least the coming 12 months. The company had $8.2 billion in cash and equivalents as of Aug. 31 and has raised $12.5 billion through financing operations since March. Carnival expects the monthly cash burn rate to moderate from $770 million in the third quarter to $530 million in the fourth quarter.
Still, considering the depth of the coronavirus pandemic, I have trouble seeing recovery right on the horizon. In a filing in early October, Carnival made a sobering comment: "We believe that the ongoing effects of COVID-19 on our operations and global bookings will continue to have a material negative impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of such outbreak."
Carnival said bookings for the second half of next year are higher than they've been in past periods. But these bookings include cruises booked with credits from travelers whose cruises were canceled this year. So, it's difficult to get a clear picture of how strong demand will be once cruise credits are no longer in the mix. And speaking of cruise credits, about 55% of guests whose cruises were canceled didn't choose that option. Instead, they asked for refunds. Will they come back for a cruise in the future? That remains an unknown.
Why can Carnival torpedo your portfolio? Because we don't know when sailings will resume and if or when demand will return to usual levels. That means we can't expect earnings or the share price to eventually climb back to where they were before the crisis. The duration of this pandemic could completely change the outlook for future revenue, net income, and share price. So right now, it's best to let the Carnival ship sail by.