Over the last three months, Carnival (LSE: CCL) shares have been hammered. Hit hard by the coronavirus pandemic, the stock has fallen from around 3,650p to just 912p – a decline of approximately 75%. It’s the worst-performing stock in the entire FTSE 100 index over that period.
After that kind of spectacular collapse, you might be wondering whether Carnival shares are now a bargain. So, let’s take a look at the investment case.
Near-term losses
The first issue to address is near-term profits. Since mid-March, all major cruise lines have suspended their operations. And Carnival has advised its suspension will last until at least 27 June.
Given that the company is burning through between $500m and $1bn per month in costs, it’s pretty clear the disruption is going to result in a significant financial hit in the short term.
On 6 April, Carnival said it cannot estimate the impact on its near- or longer-term financial results. However, it also advised it expects a net loss on both a US GAAP and adjusted basis this financial year.
So, it’s fair to say there’s substantial short-term financial uncertainty here.
Carnival shares: can the company survive?
Having said that, it doesn’t look like Carnival is at risk of going bust in the immediate future. The company has avoided an immediate collapse by securing $6.25bn of fresh funding through a combination of debt and equity. It also recently fully drew down its $3bn multi-currency revolving credit facility.
In addition, the group has taken action to bolster its liquidity. For example, it has made capital expenditure and operating expense reductions. It has also suspended its dividend and share buyback scheme.
Overall, this cash infusion and cost reductions should give Carnival some breathing space in the short term. According to the company’s 3 April update, it has sufficient liquidity to satisfy its obligations, and remain in compliance with its existing debt covenants for the next 12 months.
However, it also said it cannot assure investors its assumptions used to estimate the liquidity required are correct, as it has never previously experienced a complete cessation of its cruising operations.
Medium-term outlook
Another issue to consider is how the business will perform when operations do kick in again. Will people still want to book cruises later this year, or in 2021, knowing how contagious and dangerous Covid-19 is?
Carnival CEO Arnold Donald recently said cruise bookings for 2021 are “strong.” However, I’m not convinced. I certainly wouldn’t book a cruise right now. At present, it feels risky just going to the supermarket.
Are over-65s going to book cruises in the same way they have in the past? I’m really not sure. I may be wrong but, in my view, getting back to ‘normal’ could take a long time.
Add in the fact that the company is facing a reputational blow for allegedly ignoring the dangers of Covid-19, and the medium-term outlook for Carnival shares doesn’t look great, in my view.
Are Carnival shares worth buying?
All things considered, I think Carnival shares are too risky right now. There’s a chance the stock could rebound if news improves. However, overall, the risk/reward proposition doesn’t look so favourable, in my opinion.
Ultimately, I think there are more attractive investment opportunities today.
