Carnival Cruise Lines (NYSE:CCL) stock has slowly but steadily moved higher as the company approaches its July 3 relaunch date. However, COVID-19 beached this stock as the pandemic forced its ships to stay in port for 15 months, and the effects of that shutdown could linger for years.
As its cruise liners return to the seas, Carnival stock will face three struggles that will probably run investors aground for the foreseeable future.
1. Carnival has a revenue problem at the moment
Carnival has had to survive on negligible revenue since the beginning of the pandemic. In the first quarter of 2021, it reported only $26 million in revenue, a decline of over 99% from the $4.8 billion it brought in during the first quarter of 2020.
While revenue will certainly improve in July when the company can finally set sail, ramping up to pre-pandemic levels will probably take time. Many travelers may recall that early in the pandemic cruise lines quarantined passengers as COVID-19 spread. While all July cruises will require proof of vaccination, rebuilding trust will take time and cost the company revenue.
To that end, Carnival has offered significant discounts. In some cases, travelers can take cruises for up to four days for less than $200 per person. Still, while such prices could draw in the passengers, the company will likely not earn significant profits by offering such packages.
2. Carnival has a lot of new debt to account for
Carnival can afford to offer such discounts due largely to the debt it accumulated during the shutdown. As of the end of Q1 2021, it holds more than $31 billion in total debt. This easily surpasses the approximately $13 billion it held at the end of Q1 2020 when the pandemic had just begun. However, that also significantly exceeds Carnival's $20 billion in stockholders' equity, the company's value after subtracting liabilities from assets.
The good news for Carnival is that it holds about $11.5 billion in cash and short-term investments. This means that it has the necessary capital to revive its business. Additionally, once its ships sail again, its burn rate should fall significantly from the $3.3 billion in negative free cash flow it experienced in the first quarter.
Still, even when business returns to normal, those who buy Carnival stock will have to face the direct consequences of the debt burden. In 2019, the company reported about $5.4 billion in cash from operations. However, that year it reported $5.4 billion in capital expenditures, and it paid $1.4 billion in dividends. So even when cash flows return to pre-pandemic levels, it will probably have to forgo business improvements and dividend payouts for some time while it focuses on paying down debt.
3. Carnival's stock price is not pricing in its headwinds
Moreover, while paying down debt will strengthen the balance sheet, it leaves new investors with little incentive to buy the stock. Unfortunately for them, Carnival stock does not appear to price in the struggles the company will probably face. While it has fallen by more than 40% since the beginning of 2020, Carnival has climbed steadily since the spring of 2020. This has taken it near 52-week highs.
Also, valuation has become a concern to the extent that investors can measure it. Carnival lacks sales or earnings, two metrics analysts often used to help determine a valuation. However, when evaluating the price versus the company's book value, or its value after subtracting liabilities from assets, the stock's price appears elevated.
The stock price increase has taken the stock to about 1.75 times its book value. While that may not sound high, Carnival sold for a price-to-book value ratio of 1.4 in January 2020, before the start of the pandemic.
For the above reasons, Carnival's July relaunch could become a "sell the news" event as investors contend with the realities of repairing the balance sheet. Revenue will likely not bounce back immediately. Moreover, the company's considerable debt burden and higher price relative to its book value could hamper stock price growth. When investors fully take the long-term effects of the company's shutdown into account, it could shipwreck this leisure stock for some time to come.