It was just 14 months ago that we were on a cruise to Alaska aboard a Norwegian Cruise Line (NCLH) ship but now it seems like it's been a lifetime. Cruising had become big business in the U.S. over the years, an affordable way for many to take a vacation, but due to Covid, the industry has been all but mothballed. What's worse, the potential dates to restart continue to be pushed further into the future as Covid cases are on the upswing.
Carnival Corp. (CCL) , the largest name in the industry, which was a $70 stock less than three years ago, now languishes at $16. Earlier this month, CCL announced the continuation of its "pause" for North American cruise operations through the end of 2020. A return to profitability is not expected in 2021, while some analysts believe it could be back in the black in 2022.
While there's been great progress on a vaccine, thankfully, which should help us back to the path of "normal", and ultimately get the cruise line industry back on its feet, CCL is not the same company it was pre-Covid. Investors who see the currently "depressed" stock price as a buying opportunity need to review what the company has done to stay afloat before making a decision on the name.
The capital structure of CCL has changed a great deal due to Covid as the company has raised funds in both the debt and equity markets in order to see it through the crisis. The best way to view this is not through market cap alone, but enterprise value, which also considers debt and cash (EV which is market cap + debt - cash). At fiscal year-end 2017, for instance, the company's EV was about $60 billion, and the stock was trading at $65.64. At that time, the market cap was about $51 billion, debt was just over $9 billion, and there was about $400 million in cash.
As of last Friday, CCL's enterprise value was about $32 billion ($15 billion market cap, $8 billion in cash, $25 billion in debt). So while the stock price/market cap is down 75% over the past three years, due to increases in debt, the EV is about half of what it was. Shares outstanding may now be as high as about 900 million, after the company sold another 162 million shares in the past month, in two offerings. That does not include further dilution due to potential conversion of the August convertible bond issue (113 million shares).
To get back to a $60 billion EV, for instance, if that is even possible, would imply a stock price somewhere in the $40's, and that assumes a return to profitability to pre-Covid levels. In other words, due to massive changes in CCL's capital structure, including increases in both debt and equity, upside to the stock price may be more limited than investors believe, and that's assuming that the company can see its way through to a restart of cruises. The wildcard here is whether or when consumers will re-engage with cruising once it is allowed.
We may continue to see the stock move higher on those days that a vaccine appears closer, and fall if restarting voyages is pushed further into the future. But the takeaway here is that CCL is not the same company it was pre-Covid from a capital structure standpoint. It is much more highly leveraged, and shareholders have been diluted. You can't simply look at the stock price, and deem it cheap because the price has fallen so sharply.
