Shares in cruise giant Carnival (LSE: CCL) have crumbled over the past few weeks. It’s easy to see why investors have been running for the hills. The coronavirus outbreak has impacted a range of companies in a variety of different industries, but none more so than Carnival.
Virus outbreak
The Carnival group owns Princess Cruises, which is the owner/operator of the Diamond Princess, the cruise ship that became a coronavirus breeding ground. Of the 2,600 guests on board, just under a third contracted the virus.
And it now looks as if another Princess Cruises vessel could be struck down. The Grand Princess, which was on a 15-day voyage, has had to cut its trip short after a man on board died from the virus.
These developments are bad news, not just for Carnival, but for the broader cruise industry in general. What’s more, at this stage, it’s impossible to tell if any more of the company’s customers will fall ill with the virus and what the financial cost will be to the business. It seems as if management is just as in the dark as its investors.
In a short trading update published at the beginning of February, the company declared a fall in bookings and cancelled voyages as a result of coronavirus would have a “material impact” on its financial results. The update went on to say that “since the situation continues to evolve, the company is currently unable to determine the full financial impact on its fiscal year 2020.“
Management is planning to give investors a further update at the end of March.
Undervalued?
Considering all of the above, it’s no surprise investors have been selling shares in the cruise giant over the past few weeks.
However, for long term investors, this could be a great opportunity. While there’s no doubt the current development will have an impact on Carnival’s earnings this year, it’s unlikely to have a significant influence on the group’s growth over the next five to 10 years. The cruise industry still only makes up a small percentage of the total global tourist market. And the sector is growing rapidly.
Carnival is one of the most prominent players in the sector, and that gives it a tremendous advantage. The company’s robust balance sheet, combined with its reputation, should help the group pull through the current situation. Smaller peers might not be so lucky, with their weaker balance sheets likely to suffer more than the giants of the industry.
Experienced team
The last time Carnival saw such a hostile environment was in the financial crisis. Not only did the group pull through, but it came out stronger the other side. The company’s current CEO and chairman were also with the business during this time, suggesting they have the experience to help the group pull through this time around.
Therefore, after recent declines, the stock could be an attractive investment for long-term income seekers at current levels. The cruise operator’s dividend yield stands at 7.5%, and the distribution is covered twice by earnings per share. That could be too good to pass up in the current low-interest-rate environment.
