Shares of cruise line operator Carnival Corp. (CCL) enjoyed a 9% bump Tuesday following news that its AIDA line, based in Germany, would start sailing again on March 20. The particular ship, the AIDAperia will sail around the Canary Islands.
The reaction to this news is one of hope that cruising is on the way back. However, perhaps unrecognized in the press release was that this voyage was yet another delay. AIDA had cruises scheduled for March 6 and March 19 that were cancelled. In addition, the AIDA line, which was acquired by Carnival in 2003, is just a small part of the whole Carnival pie; it accounts for 14 ships out of 88 total (as of last Nov. 30), representing 14% of Carnival's total passenger capacity. Investors have been looking for some good news for the industry, and evidently, the AIDA news fit the bill.
This news came on the heels of yet another Carnival debt offering, when the company priced $3.5 billion of senior notes (5.575%, due March 1, 2027), to be utilized for 2021 debt principal payments and general corporate purposes.
I've probably beat the horse dead about the CCL's ever-changing capital structure and massive increases in both debt and equity issuance. These moves have been necessary, along with the sale of up to 19 ships, in order to see Carnival through the Covid-19 crisis, which has left it dead in the water for nearly a year. However, the math for me, primarily the current stock price, still does not add up and still seems both frothy and unrealistic.
Here's the math one more time behind the company's enterprise value, or EV (market cap plus debt minus cash), which gives a more realistic view of how the markets are valuing a company than market cap alone.
CCL's current market cap is $24 billion; adding total debt of $27 billion and subtracting cash of $9.5 billion (as of Carnival's Nov. 30, 2020, year-end) yields an enterprise value of $41.5 billion. To keep things simple, I will not include the new $3.5 billion debt offering, which at least initially would not add to EV as it would go to cash and/or to pay off other debt. I also haven't assumed any cash burn for December, January, and February.
Carnival's market cap as of November 2019 was $31 billion; adding debt of $11.5 billion and subtracting cash of $500 million yields an enterprise value of $41.95 billion. Keep in mind, that year Carnival generated $20.8 billion in revenue and earned $3 billion, or $4.32 per share.
The enterprise values of November 2019 and now are very similar; the difference is that debt accounts for a much bigger proportion of EV now. Carnival closed Tuesday at $22.47; in November 2019, shares were trading at $45. In addition, shares outstanding have grown from 687 million to more than 1 billion.
This just does not add up. It has led me to put my money where my mouth is, to a certain extent, and I have purchased some deep in-the-money $30 January 2022 CCL put options.
