Carnival Corp.'s (CCL) first-quarter release was a bit rougher than expected, but it did demonstrate that the cruise industry is starting to come back to life.
Carnival reported that 75% of its capacity is back in operation. That's a huge improvement, especially within an industry that was dead in the water for nearly two years. However, the question is how long it will take to repair the damage done during the pandemic to Carnival's capital structure, measures that kept the company afloat.
Carnival reported a loss of $1.66 per share for the quarter, 28 cents worse than consensus estimates. Revenue of $1.62 billion -- the largest figure since the first quarter of 2020 ($4.789 billion) -- missed by $640 million. The company ended the quarter with cash and short-term investments of $6.9 billion and debt of $34.9 billion, for net debt of $28 billion. That's up from $24 billion at the end of the last quarter, when Carnival had $9.1 billion in cash and short-term investments and $33.2 billion in debt on the books. In the past quarter, Carnival burned through $2.2 billion in cash and added $1.7 billion in debt.
At the outset of the pandemic, Carnival had $1.4 billion in cash and $12.9 billion in debt, for net debt of $11.5 billion. Net debt is up $16.5 billion since then.
Issuing debt was not the only way Carnival raised capital during the pandemic, it also issued massive amounts of stock. Shares outstanding rose more than 66% over the past two years, from 684 million to 1.137 billion. That puts Carnival's current enterprise value (EV), which is calculated by adding market cap to debt and subtracting cash, to $49.5 billion. Two years ago, just prior to the pandemic, the EV stood at $33.5 billion.
Whether the end of February 2020 (when the company's first quarter ended) is a good basis for comparison remains to be seen. However, to get to the same $33.5 billion EV of that timeframe would imply a current stock price of just $5.50. Rising debt and the massive share dilution are the culprits.
The bottom line is that due to big changes in Carnival's capital structure, it is ill-advised to compare the current stock price (CCL closed at $18.93 on Tuesday) to one from before the pandemic-related issuance of stock and debt. In early 2018, Carnival traded above $70 a share; it had earned $3.61 a share the prior year and had an EV of around $60 billion. In other words, it would be foolish to believe the current price is undervalued just because Carnival traded higher in the past. This is not the same company.
Carnival expects to be in the red for the second quarter and profitable in the third quarter. Consensus estimates are calling for third-quarter earnings of 61 cents. Carnival is not expected to return to full-year profitability until 2023, with consensus estimates calling for earnings per share of $1.69.
It is somewhat amazing that the industry survived the pandemic and is showing signs of life. However, Carnival still appears overpriced, at least to this value investor.