Carnival faces a long road to recovery – avoid for now

If there was a trophy for the company that had suffered the most during the pandemic, cruise operator Carnival (LSE: CCL) (NYSE: CCL) might be the company to take it home.

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.

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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.