Investors in Carnival Cruise Lines (CCL 0.56%) have sailed in rough waters for a couple of years now. The COVID-19 contagion shut down its industry for more than a year, and the stock price has remained volatile as investors and analysts go back and forth on whether a full recovery will happen anytime soon.
While its industry struggles, rising occupancies show that passengers want to return to cruising. But is there enough interest from the passengers to get investors interested enough to make Carnival stock a buy?
Carnival's pandemic recovery
Two years ago, the entire industry shut down due to COVID-19. However, after reaching the low point in March 2020, Carnival stock surged higher along with other stocks, likely in anticipation that it would sail again soon. But that relaunch date experienced repeated delays and didn't actually come for another 15 months or so when, on July 3, 2021, Carnival's first cruise since the shutdown sailed out of Galveston, Texas.
More than a year after Carnival resumed operations, revenue still lags 2019 levels, and the stock has fallen to levels near the 2020 lows. In the second quarter of fiscal 2022, which ended May 31, Carnival reported $2.4 billion in revenue. While that is a massive improvement from the year-ago quarter when it shut down, it is approximately half of the $4.8 billion in revenue from the second quarter of fiscal 2019.
Occupancy for Carnival's ships came in at 69% in Q2. That is a significant improvement from Q1's occupancy rate of 54%. Nonetheless, in Q2 of fiscal 2019, occupancy stood at 105%. At the time, it reported over 100% since more than two passengers occupied some cabins.
The low occupancy had a surprising effect on net losses. During fiscal Q2, Carnival reported a net loss of $1.8 billion. Interestingly, that is only a slight improvement over Q2 of fiscal 2021 when it lost almost $2.1 billion when it could not sail.
Investing in Carnival
Revenue growth and the resulting earnings seem to leave investors with questions about whether to consider this stock a buy even though it has also shown signs of strength. According to Cruise Market Watch, 42% of passengers sailed on a Carnival-owned ship in 2021, more than on any of its competitors.
Also, a bankruptcy appears unlikely. The company holds about $7 billion in liquidity, enough to cover potential losses for a few more quarters. And given the 2023 financial forecasts, it may have enough runway to return to profitability. Analysts forecast its recovery to continue and anticipate 60% revenue growth in 2023.
They also believe Carnival will earn nearly $1 per share in 2023. That would amount to a 2023 forward price-to-earnings (P/E) ratio of just nine if it holds. That potential profit is also a positive sign amid the nearly $32 billion in short- and long-term debt, mostly built up during the shutdown.
However, with only $8 billion in stockholders' equity, the debt heavily burdens the company's balance sheet. Also, it may have to dilute shares to reduce debt. Carnival is already a significantly diluted stock, as the number of shares outstanding rose from just over 680 million in January 2020 to nearly 1.2 billion today. Investors may sell Carnival with the likely continuance of that trend.
Still, the stock appears cheap from a chart perspective. Carnival stock has fallen below $10 per share. These are levels last seen in April 2020, right after the shutdown began. That drop in the stock price has taken its price-to-sales (P/S) ratio to the 1.5 level. This is lower than either Royal Caribbean or Norwegian Cruise Line Holdings, which sell for three and four times sales, respectively.
Should I consider Carnival?
Given the company's market share and valuation, I believe Carnival is the cruise line stock of choice. Still, investors should consider avoiding Carnival and the industry in general.
Indeed, pent-up demand should keep revenue surging higher in the near term. Also, the stock price and P/S ratio are near historic lows. Nonetheless, the massive debt built during the pandemic will loom over Carnival for years. Investors also need to remember the considerable amount of share issuance likely needed to help Carnival pay off its debt. Amid the bear market, investors can probably find stocks in other industries with much smaller liabilities.