The Carnival (LSE: CCL) share price has tanked this year. Shares in the cruise giant have slumped 70% since the beginning of 2020. Following this decline, the stock looks cheap. But is the Carnival share price really undervalued at current levels, or could the stock be a value trap?
Carnival share price declines
Investors have rushed to exit the Carnival share price over the past few weeks as the cruise co’s outlook has rapidly deteriorated.
At the beginning of the year, the group was forecasting nearly $3bn in profits for 2020. This would support a dividend yield of almost 5%, according to the company and the City. However, the coronavirus outbreak forced the company to suspend all of its operations. Management doesn’t expect to resume activities until the end of June, at the earliest.
This has caused considerable financial pain. Carnival is burning through $1bn a month, even with all its ships in dock. The longer the shutdown lasts, the more money the group will burn through.
The group moved quickly to save costs. It cut the dividend and suspended all unnecessary expenses.
Luckily, investors have also been willing to support the organisation. At the end of March, it raised a total of $6.3bn in debt and equity from investors.
There was so much demand for the company’s bond issue it was able to raise more than expected at a lower interest rate than anticipated. As the firm entered the crisis with a relatively clean balance sheet, it could take on more debt if it lasts longer than expected.
On top of this positive news, it emerged a week later that Saudi Arabia’s Public Investment Fund (PIF) has built an 8.2% stake in struggling cruise operator. This seems to be a big vote of confidence in the firm, and has helped support the Carnival share price.
With more than $300bn of assets, the PIF could offer further support to Carnival if it needs it.
Safe for the time being
All the above suggests the business isn’t going to run out of money anytime soon. As such, the Carnival share price could offer an attractive risk/reward ratio, at current levels.
While the company isn’t currently generating revenues, according to management, demand for cruises in the second half of the year, and into 2021, is strong. This implies that when the group starts up again, revenues could jump.
In the meantime, Carnival has to stay afloat. This could be a challenge, but with investors willing to support the group, its chances of survival seem high.
Still, this isn’t an investment for the faint-hearted. While management is currently planning to restart cruising in June, a second wave of the coronavirus could scupper this plan.
That would be devastating for the Carnival share price. But for risk-tolerant investors, the possibility of a handsome return over the long run could make up for the short-term risks of investing.
