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Carnival’s Slow Recovery Will Limit the Gains of CCL Stock

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Carnival Cruise Line got through the worst of the pandemic in one piece. But it wil...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

Carnival Cruise Lines (NYSE:CCL) has been looking for a return to normalcy. Try as it might, however, the waters remain choppy for the embattled cruise line firm. CCL stock, after a big rally earlier this year, is back in a solid downtrend.

Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

The novel coronavirus continues to wreak havoc on the travel industry as a whole. The cruise lines in particular have struggled, due to their large debt loads and inability to return to normal operating conditions. While some travel companies, such as discount airlines, have mounted a decent recovery, the cruise business is still way down from its pre-pandemic levels.

So how should investors approach CCL stock? The company has clearly survived the pandemic, so the bears who predicted Carnival’s imminent demise were clearly incorrect. However, it will take a long time for Carnival’s fundamentals to improve much. And, meanwhile, the shares aren’t nearly as cheap as they might first seem.

Still No Clear Path to a Full Reopening

It made sense to buy Carnival and other cruise stocks last year on expectations that the company would be prosperous in the future. In mid-2020, it seemed likely that the travel sector would become fairly healthy once the vaccines were deployed. Sadly, however, this hasn’t really come to pass. The long-awaited “roaring 20s” never really materialized.

Variants of the virus keep popping up. This has led to second, third, and even fourth waves of the pandemic in some parts of the world. Meanwhile, the vaccines have proven less effective at stopping the transmission of the virus than many people had expected, so the demand for  leisure travel has flattened out.

As a result, the sector’s previously planned return to normal levels of cruising activity has been delayed. Carnival, as of Sept. 19, was operating exactly half of its U.S. fleet. That’s far better than no revenue coming in.

But in the cruise  industry, which features low profit margins and is capital-intensive, it’s far from ideal for a company to have half of its assets producing no revenue.

Some traders might think that it’s worth waiting for CCL stock to recover. While half of its business is still offline now, that revenue has to come back sooner or later, they would say.

Meanwhile, CCL stock is seemingly trading well below its 2019 levels. There’s a problem with that theory, though: In order to survive, Carnival issued a ton of new stock and debt. As a result, the company’s enterprise value (EV) — its market capitalization plus its debt — is actually higher than in 2019. So at today’s stock price, the market is saying that Carnival is worth more now than before the pandemic started.

Disney Rains on the Parade

Every time we get a set of positive headlines about the pandemic, it’s seemingly offset by negative news. Recently, for example, it appeared that the spike of Covid cases in America’s Southeast was finally starting to ease. That is crucial for the cruise industry as many of its customers reside in that part of the country, and several of its key ports are located in Florida.

However, the improving sentiment towards CCL stock fizzled on Tuesday. That’s when Walt Disney (NYSE:DIS), in a call with analysts, disclosed that the Delta variant was impacting its business. For example, the conglomerate reported that Delta was delaying the production of its new movies. DIS stock tanked on the news.

Don’t forget that Disney operates a cruise line of its own, and just last month, Disney had said that the company was largely getting back to business as usual. So the slump of Disney’s shares on renewed Covid problems disappointed travel  companies, including Carnival.

The Verdict on CCL Stock

If you bought CCL stock last year ahead of the economic reopening, congratulations. Carnival’s stock, despite the company’s huge operating losses and its sale of many new shares, managed to quadruple off its lows at one point. That was a fantastic trade.

However, there is little reason to hold onto CCL stock now. The company’s prospects are no brighter now than they were in 2019. In fact, they’re arguably significantly less rosy. Meanwhile, Covid-19 is causing major problems far longer than most analysts had expected. And the company’s balance sheet is less than pristine, to put it kindly.

Add it all up, and there are far better places to invest than CCL stock at this time. With cruise traffic likely to be curtailed well into 2022, there is no quick turnaround coming for the industry. Consequently, the shares will stay in rough seas for the next several quarters.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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