Almost no company was hit harder by the coronavirus pandemic than Carnival (CCL 1.97%), the world's biggest cruise line operator.
Unable to facilitate social distancing and dependent on global travel and leisure, cruise lines have essentially shut down during the crisis. Even during normal times, some detractors regard cruise ships as floating petri dishes, and the pandemic has rendered cruises inoperable in much of the world.
The CDC has issued a conditional sail order that has effectively banned cruises in the U.S., and Carnival said in February that it would suspend U.S. sailings at least through May. Meanwhile, the broader prohibitions in international travel have also made it difficult to get cruises up and running again elsewhere.
Because of those challenges, Carnival stock has plunged during the crisis, falling as much 85% last spring. It's still down substantially from the start of 2020, as the chart below shows.
Uncertainty generally translates into opportunity in the stock market. Carnival, which owns several other brands including Princess, Cunard, and Holland America, and its cruise line peers continue to face plenty of uncertainty about when cruising can return to normal as virus variants circulate and the vaccine rollout faces a number of obstacles. That's one reason why the stock continues to attract a lot of attention from investors. Let's take a look at some others.
Value, value, value
Growth stocks were the stars of 2020, but value stocks are now coming back into vogue. The economic reopening should reverse trends from last year, normalizing valuations for high-flying tech stocks and propelling beaten-down value stocks back up to their pre-pandemic levels.
Carnival doesn't fit the traditional definition of a value stock, as the company is still burning through cash as it awaits safer travel conditions, but it was a highly profitable business before the pandemic. Bulls expect those profits to eventually return.
There's no question that its recent financial results have been ugly. In its first quarter of fiscal 2021, which ended on Feb. 28, the company reported a generally accepted accounting principles (GAAP) loss of $2 billion, and a monthly average cash burn of $500 million, which it expects to continue into the second quarter.
Carnival also has $1.8 billion in debt maturing over the next four quarters, though the company finished the quarter with $11.5 billion in cash and short-term investments, giving it sufficient liquidity to survive for several more years even if conditions don't improve.
By contrast, in fiscal 2019 before the pandemic, Carnival generated $3 billion in net income on $20.8 billion in revenue, showing cruise lines are a solidly profitable business model in normal times. Bulls expect the business to eventually return to those levels, and therefore see value at the current price, down nearly 50% from before the pandemic.
The pent-up demand question
The other cornerstone for the bull case for the stock is that pent-up demand will send Carnival's financial results to above pre-pandemic levels. There's plenty of evidence that people around the world are eager to travel once it's safe to do so. Booking Holdings CEO Glenn Fogel observed in February that hotel bookings had surged in Israel as vaccination rates rose, a sign of people traveling to see family or just to get away.
While cruise lines like Carnival may eventually benefit from a pent-up demand as avid cruisers are likely anxious to set sail again, the sector will probably be the last one in the travel industry to recover, as cruise lines face special challenges around docking in international ports and even reassembling crews. As long as variants are circulating, countries may be reluctant to allow foreign cruise ships to dock in their ports.
The early tale of the Diamond Princess, a Carnival ship where more than 700 on board contracted coronavirus and the ship was kept at sea for several weeks, is a reminder of the risks the company faces as it returns to normal cruising. Another such disaster is likely to scare away many would-be passengers.
The ultimate litmus test
Investing in Carnival is possibly the best way to bet on a global recovery from the coronavirus pandemic itself, as the stock's performance has basically been a litmus test for investor psychology around the crisis. Unsurprisingly, shares surged in November when Pfizer and BioNTech announced a 95% efficacy rate for their vaccine, but pulled back briefly earlier this week when the CDC announced a pause on the Johnson & Johnson vaccine.
Carnival's recovery can only take place if the pandemic is brought under control. Therefore, the stock's prospects are closely linked to news about the virus. Investors should also remember that even if business gets back to normal levels, net debt has exploded during the crisis, jumping from $11.4 billion at the end of 2019 to $19.8 billion as of its most recent report, and the additional interest expense from those borrowings as well as the repayments will be headwinds on the stock.
Carnival stock may eventually recover from the coronavirus pandemic, but it could take several years. Even as the U.S. is rapidly deploying vaccines, much of the world, including Europe, is still struggling to do so. Some countries are even experiencing surges in daily cases, including India, Brazil, and Turkey. On a global scale, daily case counts are moving higher, not lower.
The lesson for Carnival investors at this point is, much as it's been for the last year, to continue to be patient.