Carnival (LSE: CCL) is the world’s largest cruise ship operator, owning brands such as Holland America, P&O Cruises and Princess Cruises. The Carnival share price is down by more than 70% so far this year, making it the biggest faller in the FTSE 100.
However, back in the grim days of March, Carnival shares hit a low of 581p. Since then, the stock has risen by about 70% to nearly 1,000p. The company has raised about $6.5bn from investors to meet immediate costs, and is benefiting from improved market sentiment. Is it time to buy Carnival shares?
Two big questions
Last week, Carnival said it would extend the closure of its entire cruise business to 1 August. In August, eight of the group’s 105 ships will restart operations from three US ports. All other sailings will be cancelled until at least 31 August.
The decision will mean many more cancelled bookings. And further cancellations could still be required if Covid-19 travel restrictions remain in force for longer than expected.
Carnival hopes it can persuade travellers to reschedule their trips rather than receive a cash refund, but I’d guess some travellers will prefer to receive cash. This highlights the two big questions facing the firm.
How soon will travellers be happy to return to cruise ships? And can the group continue to cover its cash outgoings without needing a full refinancing, which could cause Carnival’s share price to crash once again?
I’m sitting tight
I’d love to say I bought Carnival shares when the stock was trading under 600p. But the reality is that, like most shareholders, I paid much higher prices for my stock. My holding is deep underwater at the moment. I don’t expect any dividends for a couple of years either.
Despite this, I don’t plan to sell. In my view, Carnival’s business is likely to return (mostly) to normal over the next couple of years. As the world’s largest operator, it enjoys economies of scale and huge marketing reach. It’s also highly geographically diversified.
The company expects to report a thumping loss this year. But I think shareholders can take some comfort from the firm’s low valuation. The latest accounts show ships and property valued at $38bn. At a share price of around 1,000p, Carnival stock is trading at roughly half my estimated net asset value of c.2,000p per share.
The Carnival share price could collapse again
In my mind, the big risk with Carnival shares relates to debt. I’m sure the business will recover, but I’m not sure if management will be able to do this without a more comprehensive refinancing.
This could take several forms. One option would be a rights issue, where existing shareholders can buy new shares in the business. The problem with this is that Carnival’s market-cap of about £7bn is significantly lower than its borrowings, which I estimate at over £13bn. This means a lot of new shares would be needed to make a dent in the debt. Investors might struggle to support this.
The other option is that the group’s lenders will write off some of its debt in exchange for new shares. This could leave existing shareholders with a much smaller part of the business, and big losses.
I see Carnival shares as a buy, but they’re not without risk.
