One UK stock that’s had an amazing run recently is cruise operator Carnival (LSE: CCL). Since 9 November, when Pfizer announced it had developed a Covid-19 vaccine, Carnival’s share price has jumped from about 900p to 1,700p. That represents a gain of nearly 90%. Over 12 months, it’s up about the same amount.
Is this a ‘reopening’ stock I should buy for my own portfolio? Let’s take a look at the investment case.
Carnival: a good reopening stock?
Carnival has faced huge challenges throughout Covid-19 as it was forced to suspend its cruise operations. However, the outlook for the group now appears to be improving.
In a Q1 business update posted earlier this week, Carnival said six of the company’s nine brands (which include the likes of P&O, Costa, and Princess) are expected to resume ‘limited’ guest cruise operations by this summer. This will obviously be a huge boost for the company.
As for demand from consumers, it appears to be high. As of 21 March, cumulative advanced bookings for 2022 were ahead of those for 2019 (which was a very strong year). Interestingly, this level of bookings was achieved with minimal advertising and marketing, according to the company.
“Booking volumes are accelerating. During the first quarter of 2021 they were approximately 90% higher than volumes during the fourth quarter of 2020 reflecting both the significant pent up demand and long-term potential for cruising,” said president and CEO Arnold Donald. He added: “We expect to capitalise on pent-up demand.”
It’s worth noting that City analysts don’t expect a huge rise in revenue this financial year (ending 30 November). Currently, the consensus revenue forecast is $4.6bn. That’s well below 2019 revenue of $20.8bn. However, analysts do expect a big increase for the year after. For FY2022, revenue of $16bn is expected.
My concerns
While this is all very encouraging, I do have some concerns about Carnival shares. One is that the company isn’t likely to make a full recovery for a while. The rapid rollout of Covid-19 vaccines is likely to jumpstart the cruise industry. However, a full recovery could be years away. One reason for this is that cruises will only be allowed to start operations at a reduced capacity. If we see more Covid-19 setbacks (new variants, travel restrictions, etc) a full recovery could be pushed back further.
Another concern is that the company is expected to make another huge loss this year. Currently, analysts expect the group to generate a net loss of $5.6bn for FY2021. For FY2022, a smaller loss of $268m is anticipated.
Finally, the balance sheet is a bit of a concern for me. In the group’s Q1 update, it advised it now has $26.5bn in long-term debt. By contrast, shareholders equity is $19.8m. This debt pile adds risk to the investment case, particularly when you consider that the company isn’t going to be firing on all cylinders this year.
Carnival shares: my move
Given that reopening stocks are having a good run right now, I wouldn’t be surprised to see Carnival’s share price keep rising. After all, it’s currently 60% below where it was three years ago.
That said, I won’t be buying the stock myself. I prefer to invest in companies that are financially sound and that have more certain growth prospects.
