Carnival Corporation's (CCL 1.13%) CEO recently made a surprising announcement. Despite the company's tremendous debt, it has no plans to issue shares to pay down its obligations. Such news likely relieves its shareholders, who understandably feared further share dilution.
However, cruise line stocks like Carnival still have a long road to recovery from the damage caused by the pandemic. Hence, the question for investors is whether this decision not to add shares makes Carnival a buy.
Carnival's decision
The surprising news came when CEO Josh Weinstein told Yahoo! Finance at the 2023 Milken Institute Global Conference that Carnival had no plans to sell more shares of the stock. Weinstein added that bookings for the summer travel season have improved, so much so that it just experienced the greatest number of bookings in its history over a three-month period.
Additionally, the company has "virtually no new ships in development," according to Weinstein. Pausing ship development should improve its free cash flows, money it can use to pay down debt.
Indeed, adding to the number of outstanding shares is an easy way to raise money to pay down some of this debt. However, since such moves devalue shareholder positions, most investors will likely see Weinstein's announcement as a pleasant surprise.
And with Carnival stock already trading at more than 85% below its all-time high, management likely wants to avoid actions that might further undermine confidence in the stock.
But is this move a buy signal?
Still, Carnival faces a long road to recovery. It holds almost $36 billion in total debt, and the company financial statements show $6 billion in shareholders' equity. Such conditions point to a strained balance sheet, likely leading Carnival to mediocre future returns at best.
Moreover, over the past year, total debt has actually increased by $352 million, and free cash flow in the first quarter of 2023 came in at a negative $687 million. Although that is a vast improvement from the negative free cash flow of more than $3.9 billion in the year-ago quarter, it shows that the financial deterioration has not stopped completely.
Admittedly, the bookings come amid surprisingly strong consumer spending, which could turn its free cash flow positive soon. Nonetheless, if the economy falls into a recession, free cash flow could again turn negative. That may delay its repayment plans or, worse, force it to issue additional debt or shares to stay afloat.
Even if the company can address these challenges, investors have thousands of stocks from which to choose. Many of these companies will not have the proportionate debt burden held by Carnival, making it doubtful investors will want to buy Carnival stock in large numbers. Such conditions make a significant run-up in the stock price unlikely.
Stand pat on Carnival stock
Although Carnival's intent to not add shares is good news for investors, it likely does not make Carnival stock a buy. Indeed, given record bookings and an intention to keep share counts from rising, the worst is likely over for Carnival stock.
However, the high debt levels will likely haunt the company for many years. Booking levels could also fall again if the economy worsens. Given such conditions, investors will likely earn higher, less risky returns in other investments.
