It has been a few months since I last wrote about the plight of cruise line operator Carnival Corp. (CCL) , which suffered tremendously after it was shut down during the pandemic. My issues with Carnival have stemmed from its drastically altered capital structure that resulted from the company selling massive amounts of debt and equity in order to survive, though the market seemingly failed to acknowledge those issues.
It appeared for quite a while that markets were ignoring the increases in the company's enterprise value (EV) brought on primarily by the issuance of debt and instead focused on the decrease in Carnival's stock price alone. It was classic "Carnival was a $50 stock pre-pandemic, so it must be a bargain at $20" thinking, which in my view ignored the real story.
The truth was that Carnival increased its shares outstanding by more than 70% and its net debt by more than 116% from February 2020 to May 31, 2002. Debt jumped from $14.3 billion to $35.1 billion during that time.
Since my March column, Carnival shares have fallen 41%, closing last Friday at $10.85, and the company's enterprise value now stands at about $40 billion. By comparison, at the end of the February 2020, just prior to the outset of the pandemic, its enterprise value was about $33.5 billion and the stock traded for $33.46. For comparison purposes, to get to an equivalent EV would imply a current stock price in the $5 range.
Now, with Carnival's earnings picture brightening a bit and its revenue rising, Carnival may be turning the corner and the stock is more attractive now then it was in March.
While Carnival missed analysts' first-quarter revenue estimates ($2.4 billion versus a $2.76 billion consensus), a sense of normality is returning and occupancy rates are rising. Consensus earnings estimates for 2023 and 2024 of $1.37 and $2.10 put the stock's forward price-to-earnings (P/E) ratio at 8 and 5, respectively.
However, Carnival's debt is still an issue, both in terms of interest expense and a debt-heavy capital structure, and paying it down is paramount. The debt will act as a drag or governor on the stock price (at least it should) until CCL can bring it back in line. The company must execute well from here, and another shutdown would be deadly, which is an issue over which Carnival has little control.
I also wonder whether Carnival can get back to the leaner dividend payer it once was. It was paying a 50-cent quarterly dividend prior to the pandemic. Only time will tell.
While I am a bit more encouraged that Carnival has weathered the pandemic storm, I am also cognizant that we already may be in a recession, another issue with which to contend.
I am at least warming up to Carnival.