Some companies just can't catch a break. COVID-19 was perhaps the worst disaster the cruise industry has ever and will ever face. There isn't a reasonable or enjoyable way to travel aboard a packed ship during a global health crisis. Operations were completely shut down or very limited for a long time. Sales for some quarters were reduced to almost nothing, relatively.
Just as life and travel were beginning to return to normalcy, recession fears and plummeting consumer sentiment are the latest challenges companies like Carnival (CCL -0.66%) face.
Naturally, people spend less on luxuries during economic uncertainty. The consumer-sentiment gauge is a leading indicator of near-term spending. Just how bad is it now? As shown below, it is lower than during March 2020 and the Great Recession.
U.S. Index of Consumer Sentiment. Data by YCharts.
This isn't the only disturbing news for investors interested in Carnival stock.
The stock is not as cheap as it seems
To make matters worse, Carnival, like other major cruise companies, was not eligible for bailouts or other U.S. government assistance during the pandemic. The cruise line chooses to be incorporated in Panama to avoid U.S. federal taxes. With no help on the way, it issued millions of shares of stock and took on massive high-interest debt by selling bonds that are below investment grade, also known as junk bonds.
To understand how issuing shares affects stockholders, think of a company as a pie and each share of stock as a slice of the pie. The more shares that are issued, the smaller each slice becomes. In this way, even if the stock price drops, the discount is not as large as it seems. Carnival's share count has risen 67% since the beginning of 2020.
The ballooning debt should be massively concerning to current and prospective investors. The current long-term debt is more than all the cash generated from operations (CFO) reported in the seven years before COVID-19 combined! This is illustrated below.
Data source: Carnival. Chart by author.
All of this data can get confusing. Perhaps the best way to judge Carnival's stock is by using enterprise value. That is calculated by taking the company's market cap, adding its debt, and subtracting its cash. A lower enterprise value is desirable as it indicates more cash and less debt.
In the case of Carnival, the data is stunning. The stock price has plummeted since January 2020, but the enterprise value is not down nearly as much, as shown below.
This means that investors are getting far less of a discount on the stock than it appears at first glance: only 16% rather than 82%.
To recap, since just before the pandemic, Carnival's outstanding shares have risen 67%, debt is up more than 170%, yet the enterprise value only offers investors a 16% discount. It will take years to pay down the debt. The company has already begun the refinancing cycle with some new maturity dates in 2030 and interest rates over 10%.
CCL Financial Debt (Quarterly) data by YCharts
Until then, common stockholders are unlikely to see a dividend. Sometimes stocks that have fallen hard offer investors a chance to beat the market. Other times they are best left alone. This appears to be the latter.
