Carnival Stock Remains Attractive Despite The Recent Run-up

Investment thesis

Carnival Corp. (CCL) is the world’s largest cruise company operating 9 cruise line brands across the globe with a fleet of 88 ships, with an additional 16 new ships expected to join the fleet by 2025. The company carries approximately 50% of global cruise guests to all cruise destinations including Antarctica. The company’s segments include North America, Australia, Europe, and Asia. Carnival is one of the most profitable and financially strong players in the cruise industry. Carnival Corp is also the only company in the world to be included in both the S&P 500 and the FTSE 100 indices.

After 5 years of continuous strong earnings growth for Carnival, the company hit a bump in 2019 due to challenges including a travel ban to Cuba, cancellations of cruise bookings, Hurricane Dorian, and geopolitical tensions in the Arabian Gulf. The coronavirus pandemic is yet another unexpected hurdle that has prevented Carnival from sailing across the globe, but we believe that the company is taking necessary actions to stimulate demand and increase their cost efficiencies during this unprecedented time.

Halt in Operations

The company had to halt cruise operations until September 30 of last year, which was again extended till December 31 in adherence to CDC guidelines, and to determine how to safely resume services. Despite the eagerness of the company to begin its post-pandemic life, last month, the company announced that the pause in operations will be extended again till May 31, 2021. Although the company has not yet determined when it will resume its cruising operations from U.S ports, considering the rapid pace of vaccine production and distribution in the U.S, the company is expected to resume operations in the second half of the year.

Current and Forecasted Performance

Regardless of the extended pause in operations and negative earnings due to the global pandemic, Carnival has been able to turnaround FY 2019’s negative cash flow of $-0.46 billion to a net cash flow of $9.6 billion in FY 2020. The company incurred a substantial loss of $10.24 billion in net income for FY 2020, wiping out earnings generated in the last 4 years, which possibly derived from the large amount of refunds issued to guests for canceled bookings and the pause in operations. Earnings per share have deteriorated from $4.32 in FY 2019 to $-13.20 in 2020, which is a -306% decrease, but has improved over the last 3 quarters of 2020 from $-6.07 to $-2.17. The company’s 5-year average P/E is currently at 14.13, and the dividend per share is at $1.60.

Increase in Liquidity

In February, Carnival announced a $1 billion public offering of common stock for general corporate purposes which closed on February 24. We can also see that the stock has accelerated +29% over the last 3 months ($12.80 to $26.31). Last year in November, the company closed a $1,45 billion unsecured debt offering and a €500 million unsecured debt offering. Also, earlier in February, the company closed another $3.5 billion unsecured debt offering, and they intend to use the net proceeds towards servicing debt in the current year and towards general costs. The company’s measures taken to increase liquidity to keep itself afloat make Carnival’s stock an attractive long-term investment. It shows that the company has successfully raised cash to shore up the balance sheet.

Macro-economic Conditions

Inflation dropped dramatically in early-2020 as more Americans found solace in savings rather than spending due to the uncertainty created by the virus-induced recession. Inflation is expected to tick higher in the second half of this year as pent-up demand kicks in, and the travel sector will be among the big winners of this phenomenon. GDP increased 4.1% in the fourth quarter and 33.4% in the third quarter of 2020, reflecting a gradual recovery from the sharp declines earlier in the year. If the U.S government passes the third economic relief package to its citizens, it will further stimulate economic recovery and increase the purchasing power of consumers.

As covid-19 vaccines reach more people each day, another possible economic risk for Carnival is the accelerating fuel prices triggered by a substantial rise in consumer demand as travel expectations increases. Changes in the type of fuel consumed and availability of the supply too can adversely impact the costs the company may incur. Even though some cruises of Carnival have opted out to use natural gas (LNG) to reduce fuel consumption, the current price of natural gas is $2.94 which has increased since March 2020 while the gasoline price has been stable at around $2.40 since March of last year, which will create a cost burden to the company.

Since Carnival sails to various destinations around the globe and operates in different regions, fluctuations in foreign currency play a key role because it affects people’s willingness to book cruises. In 2019, Carnival’s ticket revenues made up 68% of the total revenues but were partially offset by unfavorable foreign currency exchange rates. Fluctuation in currencies can adversely impact the company’s financial results, as well as affect the company’s decision to order new cruise ships because most ship construction payments and ship orders are denominated in euros.


Carnival is a stock to purchase for investors who can tolerate the risk and volatility associated with the cruise operator, and hold them for a long term which would bring an excellent opportunity. Most importantly, investors should stop focusing on the negatives and uncertainties, and focus on long-term growth prospects. As long as the company is demonstrating progress, its stock itself will find a tailwind. We believe the company has sufficient liquidity to get through this year until the economy starts picking up again, and we strongly expect the company to start generating revenue before the end of the year.

Disclosure: The author did not have any position in any of the companies mentioned in this article.

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Sulakshi Madawala

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