The Carnival share price is up 70%. Is it time to buy?

Is the Carnival share price too cheap to ignore, or should investors stay away? Roland Head explains the opportunity — and risk — for investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Carnival. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

How I’m trying to make a million from passive income

Invest as much as possible, regularly, and use the passive income to plough back into more shares. Here's how millionaires…

Read more »