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  • Elias Zeekeh

Is Carnival Cruise Lines Stock a Buy, Sell, or Hold!?!


Discussion of whether Carnival Cruise Lines in a buy, sell, or hold at this moment. The stock of CCL has been absolutely brutalized in the past few months. This stock was literally over $50 per share at the beginning of the year, and now is trading in the low double digits. In-fact in the prior week it actually dropped all the down to the high $7 range.


Transcript


Hello ladies and gentleman welcome to the Elias Talks money v-log where I talk all things money. Today I'm going to be talking about Carnival Cruise Lines ticker CCL and whether this stock is a buy, sell, or hold right now.

The stock of CCL has been absolutely brutalized in the past few months. This stock was literally over $50 per share at the beginning of the year, and now is trading in the low double digits. In-fact in the prior week it actually dropped all the down to the high 7s. So lets get right into it, and talk about the pros and cons of investing in CCL.


Starting with the pros:

1. They are the largest cruise by revenue by a factor of approx. 2x, and own several other well established brands outside of their own including Princess, Costa, and Seabourn.

2. They have top dog status in an industry which employees roughly a 1/4 million people in North America, and puts them in a position that it is easier to raise cash either through debt or equity. Most recently this month they raised $4 billion in secured notes at 11.5% and then another $1.75 billion in convertible notes which have a yield of 5.75%.

They also raised $500m through an equity raise at $8 per share which should help them cover the debt obligation payments for the next 12 months. To put into context late last year Carnival was issuing debt at around 1%. All be it the are paying high interest rates now, they have an ability to raise funds which is greater than their competitors.

3. Saudi Sovereign Wealth Fund has disclosed that it has taken a 8.2% stake in the company by purchasing 43.5 million shares earlier this month. The debt and equity raise plus involvement of the Saudi Government provides some level of confidence that at least in the short to medium term that the company can survive.

https://seekingalpha.com/article/4335758-carnival-liquidity-arrives-amidst-stormy-weather


The cons:

Now with the cons:

1. The cruise line industry is an asset heavy industry is in which companies keep a lot of debt. Even though CCL's balance sheet is good relative to industry peers. It is the nature of the industry to carry a lot of debt obligations, and one in which companies can burn through a lot of cash quick.

At the end of their last quarter they had about half a billion of cash, but looking at their current liabilities those are far in excess of this amount. If you look at the current ratio at their last 4 year ends it's not even 25%. An ideal current ratio is greater than 1 to show that you have enough current assets to cover short term obligations or current liabilities.

2. If the current situation lasts for longer than expected there could be an overhang on revenue for an extended period of time. Future breakouts can also act to suppress company revenue, and even though people may be able to board cruise ships they might be afraid to board them.

The challenge for carnival will be to ensure customers of the safety, and I anticipate some form of testing will be required in the future before boarding a cruise ship. There might also be restrictions placed on occupancy for social distancing reasons.

3. If these sort of conditions persist they will need to layer on even for debt or issue more equities which would dilute the ownership interest of existing shareholders further.

There will be significant pressure on them to get back up to speed next year, and even though it is likely they will eventually get back to normal volume over the next few years their capital structure could be significantly altered for a much longer period and it could be awhile before they return to their former all time highs in the $70 range.



Lastly, CCL is a cash flow powerhouse, and if normalized revenues return they can handle paying down debts they've taken recently over the next 5-10 years. Over the last 4 fiscal years they generated over $5 billion in operating cash flow annually.

But, even though the business spins off a lot of cash they need to re-invest a good chunk of this back into their fleet to keep it fresh. If they need to use these funds to now pay down debt obligations this will impact the quality of their product in the future.

Quality of experience is very important to get repeat business in cruising, so I anticipate they will keep dividends cut for years to pay down debt and try and minimize how much they reduce investment in their product.



So as far as making an investment in CCL or not I believe if you have a longer time period the pros outweigh the cons. It is currently trading between 3 to 4 x TTM earnings. If it can eventually get back to it's former earnings glory in the next 5-10 years trading at about 15 x earnings it is foreseeable to see this stock eventually get back $60 per share plus after bring down debt obligations as a result of this pandemic.

The outside risk is that the company could go bankrupt in the meantime (if the situation persists) and you would lose all your money. In my opinion this chance is real, but still worth the risk. Under the assumption we believe there is a 20% chance of bankruptcy, but also an 80% chance of getting 4x on your money in 5-10 years I would calculate the weighted probability as follows:



Assuming you are investing $10,000 and this goes up 4x this equals $40,000. If we believe the chance of this occurring is 80% then the weighted return would be $32,000. We do the same with the chance of bankruptcy at 20%, which would give you a zero result, so adding these two figures together we get $32,000 Hence my anticipated risk adjusted return is 320% over my time horizon.

That's all for today. Thanks for watching my video and those are my thoughts on the subject. If you enjoyed my video please like and subscribe to the Elias Talks Money YouTube channel or follow me on the Elias Talks Money Facebook Page. Over and Out.

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