Cruise line operator Carnival Corp. (CCL) provided an update late last week as it released its second-quarter results and reported a loss of $2 billion. The loss was not a surprise, and while there were not many surprises in this report or during Carnival's conference call there were red flags amid reminders of just how far Carnival had to go in order to see its way through the pandemic. In addition, there was the stark reminder that resuming operations will exhaust even more cash.
Carnival's operations essentially have been suspended for more than a year, and during that time the company has had to take bold steps to get to the point where it can resume operations. Those steps have involved drastic changes to the company's capital structure, including massive increases in debt. It also sold 19 ships to raise cash.
While we don't have a balance sheet for the second quarter, we do know that Carnival ended the quarter with $9.3 billion in cash and short-term investments. That is down an incredible $2.4 billion from the end of last quarter. Carnival is burning cash at a rate of $500 million a month, which is better than its earlier $550 million forecast, but that's still a lot of cash. During the quarter Carnival also paid back $1 billion in debt.
With the restart of cruise operations happening -- Carnival expects 42 ships will be cruising by the end of November -- Carnival should start to see some revenue, finally. However, the restart also will drive the cash burn rate higher, and coincidentally, Carnival has coming "progress payments" due on new ships that are being built for it. Given this confluence of events and difficulty in "projecting the timing" of restart expenses, capex and revenue, Carnival will not provide a third-quarter cash burn forecast. That was red flag No. 1.
Red flag No. 2, from Carnival chief financial officer David Bernstein, was the following statement:
"For those of you who were trying to model our future results, don't forget that margins on the third-quarter cruises will be less than our normal margins given the lower level of occupancy that is anticipated during the third quarter. However, with $9.3 billion of cash and short-term investments on our balance sheet, we believe we have enough liquidity to get it back to full guest cruise operation in the spring of 2022."
Now, as a pessimist in this case, I read that statement as a cautionary tale, one that suggests the company may need to seek more liquidity in order to get back to full strength. There certainly is enough uncertainty amid the restart to reach that conclusion. Against the backdrop of massive amounts of additional debt, equity dilution, rising interest expense, increasing cash burn and little visibility on a return to profitability, Carnival's stock looks well-overpriced, at least to me.
None of this means that Carnival will not survive; it just means there's a big disconnect between the stock current stock price and valuation.
