October hasn’t been a particularly good month for the Carnival (LSE: CCL) share price. Despite promising signs of recovery throughout most of 2021, the cruise line operator is once again watching its stock take a tumble. The shares are down around 10% since the month started, although its 12-month performance remains elevated at just under 60%.
What’s behind the recent downward trajectory? And is this actually a buying opportunity?
The falling Carnival share price
Last month, Carnival released an encouraging earnings report showing the company slowly progressing back to pre-pandemic operational levels. And just a few days ago, management announced that 90% of all US-based operations will be resuming by February next year. Meanwhile, it has also managed to refinance some of its outstanding loans, cutting around $135m (£99.2m) from annual interest payments. Needless to say, this is all good news. So why is the Carnival share price falling?
There are undoubtedly multiple contributing factors behind this. But the primary reason, as I see it, is oil prices. One of the biggest expenses Carnival has to contend with is fuel costs for its ships. And that’s hardly surprising given the size of them.
With supply chains being disrupted worldwide due to the pandemic, oil prices have begun to rise considerably. In fact, crude oil recently breached the $80 per barrel threshold, which directly translates into higher operating expenses for Carnival. Given its substantial pile of debt and lease obligations, the company doesn’t have much cash flow to spare on rising costs. As such, if oil prices continue to climb, the firm may soon be struggling to meet its bills.
Are things as bad as they seem?
Seeing margins squeezed by external factors is never a pleasant sight, especially for a company in Carnival’s situation. However, while there does appear to be a valid reason for concern, I think the market may be overreacting.
The recent refinancing efforts have provided some breathing space, as well as a buffer to absorb some of the rising costs. What’s more, the business does have around £7.8bn of liquidity on its balance sheet to keep itself afloat. Given that higher oil prices seem to be triggered by temporary supply disruptions, over the long term, Carnival’s margins may be able to recover. If that’s the case, then the recent fall in Carnival’s share price could be a buying opportunity.
The bottom line
Higher fuel costs will undoubtedly have a negative impact on this firm. However, with passenger bookings for the second half of 2022 at a new record high, this impact seems to be only a short-term issue.
Under normal circumstances, I would view this as an opportunity to add some shares to my portfolio. Unfortunately, Carnival is far from a healthy business. And while it’s making good progress in recovering from the devastation Covid-19 wreaked on the travel industry, I simply believe there are more promising investment opportunities elsewhere.
