I bought shares of Carnival (CCL 0.33%) shortly after my wife and I took our first cruise in 2017. We really enjoyed the trip and planned to take another cruise in the future. Given its vast appeal to baby boomers like my parents (who went with us on that maiden voyage) and younger travelers like us, I saw the investment potential in the cruise industry.
Unfortunately, the pandemic upended the industry, causing my Carnival shares to tumble. I had hoped the stock would eventually recover. That hasn't happened, and I don't believe shares will fully recover anytime soon. That's why I've finally thrown in the towel and sold my Carnival stock.
Cruising is recovering
I like cruising. My wife and I recently returned from our second cruise and plan to go again. And we're not alone.
The Cruise Lines International Association forecasts 31.5 million passengers will take a voyage this year. That will exceed the pre-pandemic level. Meanwhile, the industry is building several more ships, which will increase its capacity by 2 million passengers by 2026.
With cruisers packing ships again, the industry's revenue is close to returning to its pre-pandemic level as cruise lines raise prices and travelers book more extras like excursions and premium dining experiences. The U.S. Cruise Market Report projects that the industry will generate $21.1 billion of revenue in 2023, nearly double its $11.1 billion haul last year. That would be just shy of 2019's total of $23.4 billion.
With more ships on the way, the industry will have the capacity to welcome even more passengers. That should push revenue well past its pre-pandemic level in the coming years.
Carnival stock's recovery faces a huge obstacle
While the cruise industry has nearly fully recovered from the pandemic, cruise line stocks still have a way to go. Shares of Carnival currently sit about 75% below their pre-pandemic high, and they might never fully recover. That's because of the significant rise in the company's outstanding shares and debt since the pandemic:
CCL net financial debt (quarterly); data by YCharts.
The company racked up debt and issued a boatload of shares as it burned through cash to continue operating during the pandemic and subsequent recovery. The dilution and debt have put significant downward pressure on the share price.
Carnival currently has $35 billion of debt, a quarter of which matures over the next few years:
Image source: Carnival.
On a positive note, the company has finally stopped bleeding cash and is starting to generate positive free cash flow. That will enable it to pay down debt in the coming years.
However, it has $9 billion of debt maturing through 2025. While the company believes it has the cash flow and liquidity to address these maturities without needing to sell additional shares, a recession or credit crunch could upend that plan. More dilution would make it even harder for the share price to recover to its pre-pandemic level.
Meanwhile, with the focus on continuing to pay down debt and upgrade its fleet, Carnival won't generate excess cash to repurchase shares or reinstate its dividend anytime soon. Because of that, the outstanding share count, which ballooned during the pandemic, will remain elevated. Unless earnings skyrocket, the company's earnings per share will remain well below the pre-pandemic level, which will prevent the share price from recovering.
A full recovery in the stock isn't likely to happen
I had held on to my Carnival stock, hoping that an eventual recovery in the cruise industry would drive shares higher. But given its debt burden and the significant increase in outstanding shares needed to keep it going during the pandemic, I don't see a path for that to happen. The share dilution will remain a headwind for a full recovery in the stock price. Because of that, I've decided to cut my losses and sell my shares.
