The earliest days of the pandemic were disastrous for Carnival (CCL 2.30%) (CUK +6.55%). Halted cruising operations led to a loss and ballooning debt -- and prompted many investors to jump ship. The stock has dropped more than 60% from its pre-covid level.
Since, the situation has greatly improved. Carnival restarted cruising, and demand has soared. The world's biggest cruise ship operator even reported record bookings and customer deposits during the most recent quarter. Still, debt looms large, topping $30 billion. That's kept some investors away from the stock -- and kept the stock from returning to its pre-pandemic price. But there's one number from Carnival's recent earnings report that, if you're wary about the cruise giant, could completely change your opinion. Let's check it out.
Carnival's debt
Before getting to the number, let's talk a little more about Carnival's debt. Because this number has to do with that subject. Carnival took on the borrowings to help it stay afloat (excuse the pun) as the pandemic halted sailings. The move served its purpose -- but left the cruise giant in a very difficult situation. One with a widening loss and an outflow of cash. And that left investors wondering how Carnival would pay off the wall of debt.
CCL Net Income (Annual) data by YCharts
Fast forward to recent times. In the first quarter of this year, Carnival offered us a bit of good news. Cash from operations had turned positive, and this would allow the company to move forward on debt repayments. And Carnival added to the good news in the second quarter as cash from operations continued to rise.
In fact, the company even pre-paid $1.4 billion of variable rate debt in the quarter. Now, let's get to that number that may shift your view on Carnival from pessimistic to optimistic. And that number is "80%." Thanks to Carnival's efforts, now 80% of its debt has fixed interest rates. That means only 20% of the company's borrowings are vulnerable to interest rate hikes. This is particularly important in a climate like today's, with interest rates on the rise.
The recent prepayment of debt with maturities this year and next year saved Carnival more than $80 million in interest expenses.
And, in more good news, Carnival says its liquidity and expected return to profitability in the second half of the year will help it continue paying down debt. The company also said debt peaked back in the first quarter -- so the worst of this problem is likely in the past.
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Key Data Points
Your comfort with risk
So, what does all of this mean for you as an investor? As I suggested, you may be feeling at least a bit more positive about Carnival now than you were a few minutes ago. Does that mean you should buy the shares? This depends on your comfort with risk.
It still isn't smooth sailing for Carnival. This debt news is something for investors to cheer about for sure -- but it doesn't change the fact that Carnival faces a high level of debt. And it means the cruise giant will use a significant amount of cash flow to pay that down instead of investing in growth, for example. If you're a cautious investor, you may be better off keeping Carnival on your watch list for now.
But, if you're OK with some risk, you might consider scooping up some Carnival shares. Challenges remain -- but the company has done a respectable job of addressing the debt problem and taking steps toward profitability. I wouldn't expect the stock to return to its 2019 levels any time soon. But if Carnival meets its profitability goal and continues to pay down debt, the shares could gain considerably over time. And that means right now may be a great moment to jump on board.
