Carnival Corp. (CCL) , which is attempting to fight its way back after the cruise line operator was shut down during the pandemic, released somewhat better-than-expected first-quarter results before the market open on Monday. Revenue of $4.43 billion was $130 million ahead of consensus estimates, while a quarterly loss of 55 cents a share was 5 cents better than expected.
While Carnival shares fell 5% on the day of the announcement, they picked up 6% Tuesday following a tepid Wells Fargo upgrade from "Underweight" to "Equal Weight" with a $9 price target. CCL closed at $9.33 on Tuesday.
There was some good news in this quarterly report, namely that consumers want to cruise again. Carnival's total customer deposits were $5.7 billion, representing a first-quarter high, and eclipsing the previous record of $4.9 billion (in 2019). Occupancy for the first quarter was 91%, which was seven percentage points higher year-over-year. Adjusted EBITDA of $382 million was better than company guidance of $250 million to $350 million issued in December.
However, the elephant in the room remains, that being the large amount of debt and equity the company had to raise during the pandemic just to stay alive.
Carnival ended the first quarter with $5.4 billion in cash and $35.1 billion in debt, for net debt of $29.7 billion. At year-end 2019 (with Carnival's fiscal year ending in November), just prior to the pandemic, net debt was $11 billion.
During the same timeframe, Carnival's shares outstanding jumped 82% to 1.258 billion. This is simply not the same capital structure that existed pre-pandemic.
Carnival's mountain of debt resulted in $539 million in interest expense for the quarter and $1.5 billion for the trailing 12 months. Interest expense for 2019 totaled $229 million. Carnival eliminated its dividend during the pandemic, which should help cash flow, but the company has a long way to go in order to get out of the woods, especially for shareholders.
I have little doubt the cruise business is roaring back to life and ultimately will eclipse its pre-pandemic successes. However, I am still skeptical about Carnival's prospects for its shareholders.
First, the dilution is significant, as is the debt and resulting interest expense. Shareholders need to remember that they are last on the list in terms of the capital structure should the company's road back to profitability hit a pothole or two.
I love a turnaround-comeback story but still can't get onboard here. While consensus estimates for 2025 imply a forward price-to-earnings (P/E) ratio of 8, it's not as cheap as it sounds for a company with so many risks and considerable debt.
This is still a stock for advanced traders only.
