2022 is finally over, closing the chapter on a financially brutal year that sent Carnival (CCL 1.13%) stock down over 60%. But 2023 looks like it will be just as challenging for the embattled cruise ship operator. Let's discuss some reasons why investors may want to stay far away from this sinking company.
The recovery is incomplete
The COVID-19 pandemic battered the cruise industry through movement restrictions and a no-sail order that grounded operations for much of 2020 and 2021. Now that the worst of the crisis is over, Carnival benefits from easy comparisons against these prior periods.
Financial results for the company's fiscal fourth-quarter (ended Nov. 30) highlight the recovery.
Revenue jumped almost 200% year over year to $3.84 billion. But while that number sounds great on the surface, it is still down substantially from the $4.8 billion reported before the pandemic in 2019. Unlike other hard-hit industries (hotels, for example), which have surpassed previous highs, the cruise industry remains muted. This is despite steps by Carnival and its peers to remove most of their remaining testing and vaccine requirements for most voyages.
According to research cited by CNBC, the global cruise industry won't return to pre-pandemic levels until 2027 because of lingering pandemic aftershocks, especially in China and Europe. This is bad news for Carnival as it struggles to generate cash flow to service its mountain of debt.
Debt is out of control
In fiscal 2022, Carnival generated an operating loss of roughly $4.4 billion. To be fair, that's a significant decline from the $7 billion lost in 2021. But operations were grounded for much of the previous year. Now, the problem is weak margins. Carnival faces higher fuel costs, wages, and other headwinds because of inflation. The losses will make it harder for the company to manage its massive debt load.
Image source: Getty Images.
As of the end of the fiscal year, Carnival reports a staggering $31.9 billion in long-term debt, most of it gained as it struggled to stay afloat during the pandemic. These liabilities will have to be paid back, and, in the meantime they generate significant interest expense -- a sum that totaled $1.6 billion in 2022.
Investors should expect debt servicing costs to go up as rising rates increase the coupons on Carnival's variable-rate debt while making it more expensive for the company to raise additional financing.
Not as cheap as it looks
After its substantial drop in 2022, investors can be forgiven for thinking Carnival Corporation is now a cheap stock. Its market capitalization of $10.5 billion gives it a price-to-sales multiple of just 0.9, which is lower than the S&P 500 average of 2.3. But when you buy a company, you get its debt along with its equity -- a calculation called the enterprise value.
With an enterprise value of over $40 billion, massive interest expense, and no operational cash flow, Carnival looks very expensive for the amount of risk it carries. Investors should avoid the stock because of the possibility of continued declines in 2023.
