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Carnival Corporation (CCL)

For those of you who love to go for cruises, Carnival Corporation (CCL) shouldn’t sound unfamiliar to you. It is the world’s largest cruise company, carrying nearly 45% of global cruise guests. With operations in North America, Australia, Europe and Asia, they operate a portfolio of leading global and regional cruise brands like Carnival Cruise Line, Princess Cruises and Seabourn.

However, when the COVID-19 pandemic hits, the cruise industry was one of the worst hit industries. Ever since The Centers for Disease Control and Prevention (CDC) issued the No Sail Order for cruise ships effective March 14, 2020 and had extended several times the No Sail Order, the cruise companies are basically burning cash everyday. As the company pointed out in their second quarter ended 31 May, 2020, “The longer the pause continues, the greater the impact on the company's liquidity and financial expectations.”

With the sharp drop of share price from $50 in Dec 2019 to the current share price of around $15, a 70% decrease, does this present a golden opportunity to buy in the dip and reap in the potential upside? In this article, we will try to explore this in using a simple SWOT analysis.

Strength

Used to be a good business with high net profit margin

Prior to the COVID-19 pandemic, the company’s revenue has been steadily increasing over the years. Net profit margin was at a 15.1% averaged over the 5 years period. This proved that this business was a very lucrative business.

Good operating cashflow business model

CCL had always been able to generate significant operating cash flow from its operations. Customers usually have to pay for their cruise tickets via bookings from online first before they get take the cruise. This is turn will enable CCL to have a solid cash flow when demand for cruises start to pick up.

Weakness

Suffer huge losses in 2020

CCL will definitely see massive losses in the year 2020. We also do not expect to see CCL recover back to the normal level of profits anytime soon even when the vaccine is available.

Interest expenses will increase significantly in coming years

The cruises companies have been borrowing very heavily during this period, and they are borrowing at a very high interest rate. In a recent news release on 14 Aug, 2020, CCL announced that it has issued a private offering of $900 million aggregate principal amount of 9.875% second-priority senior secured notes. All these high interest borrowings will eventually dilute the net profits in the coming years.

Opportunities

Demand for the Cruise Industry may pick up

When the vaccine for COVID-19 is eventually developed, people will start traveling and going for cruises again. After so many months of leisure travel banned due to COVID-19, demands for cruises may see a sharp rebound.

Risk

Risk of Bankruptcy

The risk of bankruptcy is real as CCL continue to burn cash everyday without resuming operations. With this great uncertainty situation, CCL may eventually run out of cash. Customers cancelling and demanding for refunds on their cruise’s tickets will only make things worse. In the event of a bankruptcy, shareholders may get wiped off their investments totally and be the last to get paid, if anything is left at all.

Lawsuit – Class Action Complaint

There has also been a class action complaint for damages brought up against CCL due to their handling of the COVID-19 outbreak from the passengers and even the crew members. This might not only have an adverse impact to their financial impact, their reputation will also be tarnished.

Conclusion

Given the exceptionally high risk of this industry currently, I would advise to buy in cautiously. I do believe demand for cruises will eventually pick up, but it may take years. Hopefully, CCL will be able to sustain till then.

Date of writing: 18 Aug 2020

Disclaimer: The article contains some of my personal opinions and I do hold some of CCL stocks.