Between the end of 2020 and the beginning of April, Carnival shares lost nearly 90% of their value as the group effectively shut its door to customers. The corporation came dangerously close to the edge, and was only saved after the Federal Reserve opened the money taps and flooded the market with cash.
In the year to March 2021, Carnival burnt through more than $7bn. It only weathered the ordeal because it was able to raise $23.6bn from debt and equity investors in less than 12 months.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
One figure illustrates the scale of the crisis the company faced. In the quarter to the end of August 2019, Carnival’s sales totalled $6.5bn; in the same period a year later, it earned just $31m.
Two years on, the company is still struggling. According to its second-quarter earnings report, group sales totalled $2.4bn in the three months to the end of February. That was up 50% month-on-month, but it’s still a far cry from its pre-pandemic revenue figure.
Carnival shares continue to struggle
Carnival, which is headquartered in Miami and has a dual-listing between London and New York, is clearly still suffering a post-pandemic hangover, even as the rest of the global travel industry is getting back to normal.
In some ways, the company’s issues are unsurprising. Carnival’s Diamond Princess cruise ship became one of the first hotspots for coronavirus infections when the pandemic broke out last year.
Roughly 3,700 passengers and crew members were locked down onboard the ship for 39 days and subject to further quarantines on departure. The scenario became a PR nightmare for Carnival, and the prospect of further lockdowns and restrictions clearly still weigh on the minds of potential customers.
Still, consumers are returning, albeit slowly. Five of Carnival’s nine brands now have their entire fleet back in guest cruise operations and, according to management, near-term bookings are set to outpace 2019 levels.
However, recovering booking volumes are really only part of the story here. Even if bookings return to 2019 levels, Carnival is not the same business it was before the pandemic.
A company scarred by losses
A quick glance at the group’s balance sheet shows how much of an uphill struggle it faces in the years ahead. Carnival’s debt-to-equity ratio was 54% at the end of February 2020. Today that figure stands at 350%. Meanwhile, interest costs have increased tenfold. With interest rates on the up, this figure seems unlikely to start moving in the opposite direction.
Then there are rising fuel costs to consider. In March, Carnival warned that surging energy prices would have a “material impact” on its “liquidity, financial position and results of operations” this year, which would likely push the group to a full-year loss.
This is without taking into account the potential hit to consumer confidence from a recession and the cost of living crisis (and the background threat of further waves of coronavirus).
The pandemic left some deep scars on Carnival, and it's not clear how long it will take the company to recover. It needs customers to return in large numbers and spend more than before to generate enough cash to start paying down debt. With costs rising and consumer confidence falling, the chances of it being able to do this look slim.
Refinitiv analyst estimates have the company reporting losses of $2.8bn in its current fiscal year and a slim profit of $1.5bn in 2023. That’ll be enough for the group to keep its head above water and start chipping away at debt, although it’s not clear how much of an effect the headwinds outlined above will have on these forecasts.
Add all of these factors together and while it might look as if the business appears cheap at first glance, (the stock is selling on a price/book (p/b) ratio of one) the path forward seems incredibly unclear.
Carnival might return to growth, but it could also continue to struggle and report losses. The market is unlikely to re-rate the stock to a higher valuation if the firm continues to bleed red ink. In other words, there are better buys in the travel and tourism sector.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
How to build your own ‘pot for life’ pension with a SIPP
Advice You don’t need to wait for ‘pot to life’ rules to take control of your retirement fund
By Marc Shoffman Published
Protect what matters with bespoke insurance
Your life is unique, so is standard home insurance really designed to meet your needs? NFU Mutual’s Bespoke Home Insurance is designed to be tailored to your unique circumstances.
By MoneyWeek Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in - November 2023
Tips Investors are focused on income strategies and FTSE heavyweights. We look at what investors have been adding to their portfolios in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published