What happened
Just one week after Bloomberg issued a warning about the rising cost of debt and questioned Carnival's (CCL +2.78%) ability to meet its interest payments -- a note that sent the stock tumbling -- investment bank Morgan Stanley on Wednesday issued its own warning about Carnival's debt load.
Unsurprisingly, Carnival stock fell in response, and was trading down by 5.5% as of 2:13 p.m. ET.
NYSE: CCL
Key Data Points
So what
In the note put out Wednesday morning, a Morgan Stanley analyst cited weak sales, growing economic risks, and the rising cost of interest on debt as the three biggest risks to Carnival -- and slashed their price target on the company's shares by 23.5%. The analyst further warned that investors can expect Carnival will require more cash to tide it over until conditions improve in the cruise industry, and said they should expect it will raise that cash by issuing more stock.
To an extent, that makes sense. Last quarter, Carnival reported operating losses of $1.5 billion and negative free cash flow of $1.5 billion. As such, it wasn't generating any of the cash needed to pay its $368 million in interest costs, and had to go further into debt.
Now what
The good news, though, is that Carnival's operating losses are projected to decline to just $816 million in the current quarter, after which it's forecast to deliver nearly $1 billion in operating profits in Q3.
This means that Carnival really only has to survive one more quarter before it begins generating sufficient profits to service its debt again. Even if Q2 is as bad as the analysts forecast, the $6.9 billion it has in cash remaining (according to data from S&P Global Market Intelligence) should suffice to bridge the gap.
Long story short, it looks to me like Carnival should be able to survive without needing to issue new shares. And if that's the case, then Morgan Stanley's warning about the risk of further stock dilution appears overblown.
