While Carnival Corporation (CCL 1.13%) stock has recovered sharply in 2023, its shares are still down around 50% over the last 12 months. For some investors, this will look like an opportunity to buy the dip. But it would be wise to look before you leap.
Let's discuss why shares in the embattled cruise operator are not as attractive as they might look.
The cruise industry is roaring back to life
Compared to land-based tourism, the cruise industry faced stricter pandemic-related restrictions for longer, causing it to recover relatively slowly compared to pre-pandemic levels. But this could soon change.
As of December, Carnival and some of its peers no longer require passengers to be vaccinated or submit negative COVID-19 PCR tests for cruises of two weeks or less. The end of these restrictions may already be having an impact on the company's passenger acquisition.
Analysts at the Institute for Shipping and Logistics expect cruise industry revenue to surpass pre-COVID levels (the industry peaked in 2019) by the end of 2023. Carnival's data seems to support this forecast. While its fourth-quarter occupancy was 19% below 2019 levels, advanced full-year bookings for 2023 exceed pre-pandemic levels, which could set the stage for record revenue if the trend continues.
Cash burn is still astronomical
Carnival will need all the guests it can get because of its massive cash burn. Fourth-quarter operating losses stand at a whopping $1.1 billion, which puts the company in an awkward position for meeting its substantial obligations -- namely the mountain of $32 billion in long-term debt on its balance sheet. These bonds generated $448 million in interest expense in the quarter, which is a further drain on Carnival's cash flow.
Image source: Getty Images.
And the cash flow challenges don't end there. As a cruise ship operator, Carnival runs a very asset-heavy business; it has to spend a lot of money to maintain its ships or buy new ones as it seeks to grow. In 2022, the company spent $4.9 billion on property, plant, and equipment. And all these cash outflows will have to be financed with additional debt or equity dilution, which can hurt investors by reducing their claim on the company's future earnings.
The sad reality is that Carnival's leverage situation is getting worse instead of improving. While the company paid off $2.1 billion worth of long-term debt in 2022, it raised an additional $7.2 million in the period -- along with $1.2 billion from issuing new stock.
Take a closer look at the valuation
With a price-to-sales (P/E) multiple of 1.1 Carnival's stock is significantly cheaper than the S&P 500 average of 2.4. But it is a value trap through and through. Even if the company manages to become profitable, the massive debt loan will continue to drag down earnings and cash flow. Investors shouldn't buy the dip, because the risk of investing in Carnival still seems to outweigh the potential rewards.
