There aren't too many industries that have been hit as hard as cruise line stocks this year, and industry leader Carnival (CCL +6.99%)(CUK +6.89%) feels the pain. Almost none of its ships have been sailing with passengers since mid-March, and we don't know how deep into 2021 we'll get before most of Carnival's fleet is back in business.
We're now holding out for a February restart date for Carnival's namesake brand with many of its sister ships rescheduling a resumption of their sailings several months later for select vessels. The U.S. Centers for Disease Control and Prevention (CDC) has a conditional sail order in place, but the high hurdles to gain regulatory clearance to sail again are daunting. Each ship is facing requirements for on-board testing labs, restrictions on what passengers and crew members can do on the ship as well as on shore excursions, and the tall order of simulated cruises that must be completed successfully before revenue-generating itineraries can begin.
This year has been rough. Next year could be more of the same pain. Will Carnival stock crash in 2021? Let's size up the potential stumbling blocks that might sink the investing prospects of the world's largest cruise line operator.
Like the roller coaster on the upcoming Carnival Mardi Gras ship, the stock has its ups and downs. Image source: Carnival.
Sailing into the unknown
Carnival stock has surrendered a little more than 60% of its value in 2020 through Monday's close. In sizing up if the slammed stock will crater in the year ahead one can argue that it has already crashed. However, it's not as if the value of Carnival -- the company -- has been more than halved in 2020. Carnival has taken on a lot of debt and printed new shares to raise the liquidity necessary to stay alive during the lull. Its share count has risen from 684 million to 775 million over just the past two quarters, and the weighted outstanding shares will grow again when Carnival reports fresh financials later this month. Its total debt has popped from $11 billion to more than $18 billion over just the past three quarters, and that figure too will grow when Carnival reports its fiscal fourth-quarter results in a few weeks.
Every stock and debt offering comes at a price. Back in July, Deutsche Bank analyst Chris Woronka came to the conclusion that the $4.40 a share that Carnival earned last year would be only $2.88 a share under 2023's accounting for the new share count and interest expense. The dilution has only gotten worse. Carnival doesn't have much of a choice. It's burning through $530 million a month right now, and the starting line keeps getting extended.
Today's investors aren't worried about Carnival's thinning fleet or how profitability will be squeezed on a per-share basis in the coming years. There are three questions weighing on Carnival stock's chances to rebound in 2021, and it all boils down to how the supply and demand levers play out.
- When will Carnival start sailing again?
- When will Carnival either have a widely vaccinated passenger base or get to the point where the COVID-19 crisis is a thing of the past?
- How will the current recession play out?
The answer to the first question keeps changing every few weeks, and the revisions have always been for the worse. We've had good news on the vaccine front, and some experts think that by the springtime or more likely summer of next year things could be somewhat back to normal with most of the population vaccinated -- under the rosiest of scenarios. Clawing our way out of the recession depends on many hazy variables, and even when the economy does recover the cruise industry is going to have to invest heavily in marketing to make us forget that cruise ships were hotbeds of contagion earlier this year.
All of the dilution will keep the ceiling in check for Carnival stock, but the shares won't crash in 2021 if we get satisfactory answers to all three questions. It's largely out of Carnival's hands, but thankfully it's in an industry that's used to the ebb and flow of the tide.
