At first glance, saying "never" to sailing with Carnival (CCL 0.13%) (CUK -0.36%) stock seems like an emotional decision. For all of its problems, Carnival remains the largest cruise line operator by market cap, and it holds the needed resources to survive a shipwreck in the near term. However, its time in port will probably have a lasting impact on the company for a long time to come, making it difficult for the leisure stock to gain traction long-term.

A couple takes a selfie on the deck of a ship.

Image source: Getty Images.

Carnival will have to navigate rough waters for years to come

COVID-19 will eventually fade from the headlines, and tourists will probably return to cruising. The crisis may even benefit Carnival in one key respect. The pandemic has permanently shipwrecked some smaller cruise companies that could not stay afloat without revenue. As the industry reemerges, Carnival could face less competition and possibly pick up ships from these defunct operators on the cheap.

However, the industry has remained shuttered for over a year. The Centers for Disease Control and Prevention (CDC) has offered a possible mid-July start date, according to what a CDC spokesperson told USA Today. Since almost 60% of American adults have received at least one dose of the COVID-19 vaccine, cruise lines could finally get what they want in the form of a relaunch. Nonetheless, since the CDC has pushed this date back repeatedly, investors and travelers may not believe this sail date until they see ships leaving port.

Moreover, investors cannot assume that cruises will return to full capacity instantly. The fact that Carnival has advertised many cruises for slightly above half price speaks to the fact that it will have to work to earn the trust and the business of passengers.

Finally, even as the ships return to pre-pandemic passenger numbers, cruising is not a high-margin industry. In 2019, before the pandemic, Carnival earned about $3 billion off of approximately $20.8 billion in revenue. This 14% net margin leaves little room for prolonged industry slowdowns.

Carnival's financial situation

Unfortunately, the industry shutdown has not sheltered Carnival from its massive fixed costs. The company brought in only $26 million in the first quarter of 2021. Though it offloaded 72% of its operating expenses, these costs amounted to about $1.5 billion during the period. Also, the growing need for debt financing led to about $400 million in interest expenses. Along with its other costs, the company lost nearly $2 billion during that period.

Investors should also remember that cruise ships remain in port, and they can expect at least one more quarter of negligible revenue.

Carnival holds about $11.5 billion in liquidity, meaning it can endure another year of this. Still, maintaining an idle fleet has come at a tremendous cost. It had to issue a substantial amount of new shares. Now, almost 1.1 billion shares trade, well above the 684 million shares available just one year ago. Moreover, long-term debt now stands at more than $26.5 billion versus $9.7 billion before the pandemic started. Paying back those obligations will take years.

The problem for investors is that the stock behaves as if it has already overcome this challenge. Indeed, Carnival has lost half of its value since the beginning of 2020. However, over the last 12 months, it has risen by more than 80%. If measured from the low in April 2020, it has surged by an astounding 225%.

CCL Chart
Data by YCharts.

Moreover, with only negligible revenue, earnings and sales multiples are not applicable. Still, Carnival sells for about 1.5 times its book value, the value of the company after subtracting liabilities from assets. This makes the stock seem pricy considering that it will probably not bring in significant amounts of revenue until at least the third quarter.

The state of Carnival

Admittedly, Carnival's position as the largest cruise company and its cash position make its survival likely. However, survival does not mean prosperity. And even under the best of circumstances, the lack of revenue during the pandemic will probably strain the balance sheet for years or possibly decades into the future. Even if Carnival can return to profitability, this challenge will make Carnival a stock many investors will never buy.