If I had bought shares of the FTSE 250 cruise operator Carnival (LSE: CCL) at this time last year, I would be just shy of doubling my money by now. If it continues at this rate, the Carnival share could be a great investment now.
But can it continue to double my money if I buy it today?
I think there are arguments both for and against that happening.
Why the Carnival share rise further
In the stock markets, investor sentiment goes a long way. It is responsible for the run-up in the Carnival share price to a large extent. We are now in the sixth month since successful vaccine developments. The Carnival share price has seen double-digit growth in three of these months, compared to the month before. This is despite little underlying change in the company’s operations.
Stock markets are widely expected to stay buoyant through 2021. According to the Swiss investment bank UBS, the FTSE 100 index could touch 7,200 in 2021. At sub-7,000 levels currently, this means that there is still some steam left in the stock market for the rest of this year. I reckon that Covid-19-impacted stocks will continue to be outsized beneficiaries. This includes Carnival. As it restarts its cruises this summer, even in a limited way, its share price could rise further.
Downside to the share
However, even though initial signs of a return in demand are promising, it could be a while before Carnival is able to get its business fully back in order. Its own projections are not exactly optimistic. It expects to recover fully only in another two years.
It has also run up a huge debt of $27bn in 2020, to keep going even when it could not earn revenue. While its debt-to-capital ratio is roughly comparable to global peers as per Financial Times data, I would still like to see how its debt situation evolves, considering it has more than doubled in a year’s time.
Also, the Carnival share price is still at less than half the level it started 2020 with, which sounds like there is potential for it to rise more. But I think we need to look deeper here, to get some indication of how far it can rise.
If I compare it to peers, it is not cheap. I looked at its price-to-sales (P/S) ratio in lieu of the more popular price-to-earnings (P/E), which used when a company is profit-making. At 5.7 times, it is far higher than that for other coronavirus-affected stocks like International Consolidated Airlines Group, which is at 1.6 times, and even the InterContinental Hotels Group at 5.5 times.
The takeaway
On balance, I remain unconvinced that the Carnival share price can continue rising enough to double my money in another year. However, I think it can rise from its present levels. How much by will depend on how much progress is made in the pandemic becoming a thing of the past.
