• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

Carnival Vs. Delta: Which Is Safer Way for Investors to Travel?

Cruise companies and airlines are trading well below their pre-pandemic prices, with Delta and Carnival showing potential promise as travel returns.
By BRAD GINESIN
Jul 15, 2022 | 12:30 PM EDT
Stocks quotes in this article: DAL, UAL, LUV, CCL

As the travel and tourism industry recovers, airlines and cruise lines are still trading at depressed levels. The top airlines, Delta (DAL) , United (UAL) , and Southwest (LUV) , are down on average 50% from pre-pandemic highs, while cruise stocks are down a whopping 80%.

After Delta and Carnival's (CCL)  recent earnings reports, it appears clear which industry's stocks are buyable and which to avoid. But let's take a closer look.

Delta reported a solid quarter and has finally gotten back to producing free cash flow. During the pandemic, the airline racked up losses covered by an $24 billion increase in debt. From its peak enterprise value in 2018 of $52 billion, Delta is down about 25%. The shares can rally 60% to $47 before reaching its enterprise value peak, not including the expected cash flow likely directed to paying down debt. Delta produced $1.6 billion in free cash flow in the past quarter with a strong outlook. Conceptually, if Delta continues on this fundamental path through 2023, it can pay down enough debt to raise its enterprise value peak to $60 per share.

Carnival's earnings still demonstrate they're yet to turn the ship around, burning through $2 billion in cash for the quarter. The company hasn't yet hit full operational availability of its ships, currently at 91%. Cruise pricing has remained soft, decoupling from airfare and hotel pricing, which may reflect higher supply growth. More problematic is Carnival's debt load.

Carnival had pre-pandemic debt of $10 billion, which is currently up to $35 billion after capital needs to cover enormous pandemic losses. Equity dilution increased outstanding shares by 65%. From its peak EV in 2018, Carnival's enterprise value is only down 20%.

Carnival has no imminent liquidity risk, but the company may be facing difficult financing decisions down the road. Over the last six months, the spread on Carnival's debt has widened from 450-basis points to over 1000bps. Last month, Carnival raised $1 billion in debt at a 10.5% yield -- those bonds are now trading at over a 12%. Carnival's interest cost on their $35 billion in debt is $1.6 billion, or around a 4.6% average rate. Given Carnival's much higher cost to raise capital, Carnival's interest expense can increase dramatically. Plus, about one-third of their debt is a floating rate, raising the interest expense on those bonds sooner than the maturities would suggest.

The credit rating on Carnival bonds is B-rated, but the marketplace currently deems them more akin to a CCC, with yields slightly over 14% on bonds maturing in 2027. Moody's and S&P are often slow in reacting to a changing credit risk profile by downgrading ratings, but the market seems concerned that Carnival may fall deeper into junk territory.

Carnival shares would have to double to hit its peak pre-pandemic enterprise value, a questionable risk vs. reward. Given all the challenges, the stock may be dead money at best. There's a substantial risk of dilutive equity raises to lower their leverage from 6.5-times closer to Carnival's target of 2%-2.5%. As Carnival continues to burn cash in the second half of 2022 and $4 billion in debt matures through 2023, replacing that liquidity will come at a steep cost either in equity dilution or coupon payments.

Running through the exercise of these two "reopening" stocks theoretically regaining their peak pre-pandemic enterprise values shows that the equity of both can double. Yet, the risk profile of Carnival is far too skewed negatively and makes no sense to buy vs. Delta given similar upside potential. Carnival's stock is much further down from its old highs, but a bloated balance sheet and equity dilution have kept its enterprise value high. Continued challenges plaguing Carnival and the cruise industry make the group one to avoid. Delta and the airline stocks have often been difficult investments, but the industry is the clearer reopening play.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Ginesin was long DAL.

TAGS: Air Travel | Luxury Travel | Investing | Stocks | Airlines | Transportation

More from Stocks

Trading Like It's 1999!

James "Rev Shark" DePorre
Jan 27, 2023 4:46 PM EST

The mood was bubbly as speculative investors piled into stocks with any minor exposure to Artificial Intelligence.

More Good Dividend Stocks With Pretty Charts

Bruce Kamich
Jan 27, 2023 1:31 PM EST

In this second part of a two-part series, we look at the final five of 10 stocks with the best of the both worlds.

Even Some Out of Fashion Names Are Now Back in Style

Jonathan Heller
Jan 27, 2023 12:30 PM EST

Sure, we're only one month in to 2023, but so far these stocks are starting the new year with a bang.

I'm Making Small Bets With These 2 Stocks

Bret Jensen
Jan 27, 2023 11:30 AM EST

While I remain cautious on the overall market, I continue to act upon the limited opportunities I'm finding in the current market.

Chevron Is Crushing It and for My Portfolio Too: Here's the Trade

Stephen Guilfoyle
Jan 27, 2023 10:51 AM EST

The only reason to exit the stock now is profit-taking.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:48 AM EST REAL MONEY

    Watch Doug Kass on the Daily Rundown!

    In today's Action Alerts PLUS Daily Rundown, Doug ...
  • 11:03 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend On Real Money

    It's time to start using this power to build great...
  • 03:06 PM EST BOB LANG

    LEAPS Webinar

    This week, I offered a free webinar session talkin...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login