A member of my extended family recently returned from a cruise on a Princess ship, which is part of Carnival Corp. (CCL) , and was raving about it. There were a few minor miscues that occurred, but each and every time the cruise line gave them money. It added up to a fairly substantial amount relative to the cost of the cruise. My response was as follows: "They can't afford to do that!"
The plight of Carnival has been fascinating to follow. The company has lost money for 12 consecutive quarters dating back 2020; that's no surprise as Covid shut down the cruise line industry. The way back has been long and arduous and required enormous changes to Carnival's capital structure just to keep it alive.
That restructuring included raising huge amounts of money through equity and debt issuances as well as the sale of some ships. Carnival's shares outstanding stood at 1.3 billion as of early January, nearly double the 684 million shares outstanding at fiscal year-end 2019 (November). That's huge dilution, which means earnings are spread out over a lot more shares. However, it's the increase in debt that is potentially more consequential. Net debt (debt less cash) stood at about $11 billion at year-end 2019 but now is $31.7 billion.
That means that Carnival's enterprise value, or EV (market cap plus net debt), is now about $47 billion based on Carnival's Tuesday's closing price of $11.88. At the end of fiscal 2019, the company's EV was about $42 billion. To get to an equivalent EV today would imply a share price of about $8. However, that's not an apples-to apples comparison. In 2019, Carnival generated $20.8 billion in revenue and earned about $3 billion, or $4.45 a share. At the time, that implied a trailing price-to-earnings (P/E) ratio of just 10; what's more, a leaner Carnival also paid shareholders $2.00 a share in annual dividends. That dividend was discontinued in 2020.
To be certain, money has been made in Carnival stock this year as the shares are up 49% year to date. But you can count me among the skeptics of Carnival's current valuation. The debt load alone is formidable and resulted in 2022 interest expense of $1.6 billion. Forward earnings estimates may look compelling, with Carnival trading at 13s and 10s 2024 and 2025 consensus estimates, respectively. But due to the capital structure, I'm not convinced that is cheap. The company is expected to be in the red (marginally) this year.
I believe Carnival is for traders only until it can prove it can manage its mountain of debt. As I've written many times, investors need to avoid the trap of comparing the share price of the old Carnival to the current company and deeming it cheap on that basis alone.
