Shares of cruise operator Carnival Corp. (CCL) have dropped about 19% in the last 11 trading sessions on the heels of the company's second-quarter earnings release. One of the potential red flags I noted in reaction to the those results -- namely, that Carnival might need to raise more capital in order to see it through to the resumption of full operations -- is likely a culprit.
On June 28, four days after the earnings release, Carnival announced that it would be selling up to an additional $500 million in common stock. Termed an "at-the-market" equity offering program, some of the proceeds would be used to buy back ordinary shares of Carnival plc (which trade in the UK), but only when those shares are trading at a discount to Carnival's common shares. Essentially, this appears to be a stock offering with some of the proceeds used to perform a stock buyback. What is unclear is whether any further dilution will result, and that depends on the extent to which Carnival is able to follow through on the purchase of ordinary shares.
Despite the stock's recent drop to $22.85 as of Tuesday's close, Carnival's enterprise value, or EV, (market cap plus debt minus cash) still remains elevated at $48 billion. That again is the result of big sales of stock intended to help Carnival make it through the pandemic. Shares outstanding jumped from 684 million at the end of August 2019 to the current 1.132 billion, an increase of more than 65%. During the same time frame, net debt rose from $9.6 billion to $21.5 billion.
For comparison sake, Carnival's enterprise value at the end of August 2019 was about $40 billion with the stock price at $44. The current EV is $48 billion with a stock price of about $23. To get to an EV of $40 billion under current circumstances would imply a stock price of $16. However, I am not even sure you can justify an EV of $40 billion for a company that is just starting to resume operations with little revenue, an increased cash burn rate and increased interest expense.
The 2019 version of CCL, the one with the $40 billion EV, earned $3 billion that year, or $4.45 a share. Current analyst estimates suggest a return to profitability in 2022 to the tune of 35 cents a share, followed by earnings of $1.87 a share in 2023.
You still can't justify CCL's current stock price under the circumstances, even with the recent drop.