It wasn't a surprise to see Carnival (CCL 3.50%) (CUK 3.47%) cancel its sailings through the end of June last week. Most of its smaller rivals had already written off a chance to get going again until the second half of this year, and every few weeks we see the restart buoy floating farther away.
The good news for investors is that Carnival isn't going away. It has raised a whopping $23.6 billion since the pandemic began taking its toll, arming itself with enough liquidity to go well into 2022 if not 2023 without returning to profitability. The bad news for investors will sound familiar. The rap on Carnival is that it has raised $23.6 billion in stock and debt, bloating its share count, interest expense, and enterprise value. Is the world's largest cruise line operator a buy at these levels? Let's see if Carnival stock is shipshape enough for a landlubber's portfolio.
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Sick burn
Carnival's newfound cash is going into the incinerator. It was initially projecting a monthly cash burn rate of $530 million last year. That burned to a monthly bonfire of just $500 million through the first three months of the year, but Carnival points out that it expects to average $550 million a month for the first half of the year. This is another way of saying that it's going to be going through $600 million a month for the next couple of months.
A resumption of sailing doesn't mean that the cash burn flame will flicker out. Carnival's going to be spending more money than it's making for some time even after it gets back to business.
Another problematic nugget out of last week's financial update is that Carnival had just $2.2 billion in deposits for bookings at the end of February, and most of that is in the form of future cruise credit from folks on canceled voyages. The problem here is that it also was at $2.2 billion in deposits three months earlier. New bookings are basically being wiped out by refund requests on canceled cruises from folks not opting for enhanced future cruise credit.
Bon voyage
There are some good things to say about Carnival. It's larger than its two closest rivals combined, and there's scalability here in everything from marketing to purchases. It's probably also no surprise to find that the $23.6 billion in financing that Carnival has raised since March of last year is also more than the new liquidity of its two nearest competitors combined.
Carnival's namesake line is also popular with first-time passengers given its market positioning as an economical brand. Stimulus checks can go a long way here. Carnival may not have the flashiest margins in the industry, but it's going to be a survivor.
The bad news here -- and why Carnival is ultimately not a buy now -- is that the valuation is out of whack. All of the money that it has raised and subsequently spent to stay afloat has padded its enterprise value to more than $53 billion as of Monday's close. Carnival was trading at a lower valuation before the pandemic when business was coasting along just fine.
This isn't going to be the same Carnival as before. It has a smaller fleet after unloading some of its productive ships. The quarterly dividend that it suspended more than a year ago isn't coming back in the next couple of years. Cruising will face the longest road back within the universe of travel and tourism stocks, even if the companies are already worth more than before their businesses came to a screeching halt. The valuation and the near-term fundamentals are just too risky at Carnival right now.
