What happened
Shares of Carnival (CCL 4.38%) were moving backward in December as a combination of fears of a recession and a wide loss in its fourth-quarter earnings report weighed on the stock.
According to data from S&P Global Market Intelligence, the stock fell 19% last month. As you can see from the chart below, the stock declined steadily over the course of the month.
So what
Coming into December, Carnival seemed to be building momentum as it said that Cyber Monday bookings were up 50% from 2019 levels, and its Holland America line also reported record Black Friday bookings.
However, the stock started falling on Dec. 5 in line with a broader sell-off in the market and continued to fall the following day after J.P. Morgan issued a skeptical note. Analyst Daniel Adam assumed coverage at neutral and lowered the stock's price target from $36 to $13, noting challenges from its aging fleet, rising fuel prices, and its model of discounting rooms to fill its ships. However, given his rating and price target, Adam seems to think those risks are priced in.
The stock fell again on the market sell-off on Dec. 15 after the Federal Reserve raised interest rates again and forecast more increases in 2023, raising the odds of a recession this year.
Finally, the stock briefly rebounded after Carnival reported fourth-quarter earnings on Dec. 21, but then continued its decline.
Though business is recovering from the pandemic, the company continues to report wide losses, with a net loss under generally accepted accounting principles (GAAP) of $1.6 billion, or $1.1 billion on an adjusted basis, which was $0.85 per share. Occupancy in the quarter was 19 percentage points below 2019. However, deposits hit a fourth-quarter record at $5.1 billion, showing customers are returning to the cruise line. Carnival also said November booking volumes exceeded 2019 levels.
Now what
Carnival stock has fallen sharply since the pandemic, and some investors spy a turnaround opportunity as demand rebounds at the world's largest cruise line. However, Carnival faces a heavy debt burden of $34 billion, for which it needs to pay nearly $2 billion in annual interest expense.
That's going to make profitability tough even in a best-case scenario, and with interest rates rising and a recession possibly around the corner, Carnival could face further pressures.
While there is upside potential considering the demand recovery and the steep price drop, a recovery for the business won't be as easy as some investors seem to think.
