"Distinctly we see the difference of the colors, but where exactly does the one first blendingly bleed into the others? So with sanity and insanity."
- From Billy Budd, Sailor by Herman Melville
Carnival Corporation Reports
Now, I have been on a cruise. I think they are nice. I think they can be relaxing. You eat. You drink. You participate in all kinds of recreational activities. That said, I am not a "cruise" guy. I would not say that I am biased against that business, though maybe I am, but I would rather go climb a big rock, or traipse around a Civil War battlefield with a couple of textbooks and a backpack full of maps. So... not really my cup of tea. Though I do like tea.
For the firm's second quarter, Carnival (CCL) reported adjusted EPS of -$3.30, which missed greatly reduced expectations badly. Exclude adjustments, and the EPS number becomes -$6.07. Incredible. Revenue landed at $700 million, which was down 85.5% year over year, but of course, this quarter can not be compared... to anything. The number still missed consensus view. That matters.
We all know that the problem for cruise operators is plain as day. From the firm's own statement... "Cruise operations have been in a pause for a majority of the second quarter. In addition, the company is unable to definitively predict when it will return to normal operations."
Several numbers within the numbers stick out like a sore thumb. The firm expects its own cash burn rate for the second half of the year to run in the area of $650 million for as long as the business is paused, and that's just what this is. This firm sells group fun in a confined environment. Not good when a pandemic shuts down group fun, indefinitely. The firm ended the quarter with $7.6 billion in available liquidity. The firm expects to increase the size of this availability through a refinancing of existing debt while pushing out scheduled maturities.
On top of that, Carnival will raise cash through the sale of some assets, which means that they are going to sell a few older cruise ships. The firm plans to accelerate the removal of ships from its own fleet as the year progresses. At this time, the company has in place preliminary agreements to dispose of six ships over the next 90 days. The firm expects to expand on that number.
What I found rather incredible is that Carnival, at the end of the fiscal quarter, had customer deposits of $2.9 billion, which includes $475 million for cruises scheduled later this year (2020). This is what provoked the quote up top. This is where the colors blend. Where insanity borders on the sane. I can not even fathom putting money down on a cruise right now. The "What ifs?" abound. Not just what if you get sick, but what if someone on the ship gets sick, and you can not leave your cabin for a month, or months. Need a vacation? I usually have no problem socially distancing at Gettysburg, or Sharpsburg, as long as I avoid reenactments, which I doubt they are doing right now. Walk around a state park. You'll see other people. You won't have to worry about being stuck with them indefinitely.
Though I would not take a cruise right now, nor maybe ever again, that has nothing to do with making decisions with my own capital. Would I invest in Carnival? If I thought the public would come right back I would. I know two couples who are part of that $2.9 billion. That said, neither of those couples lives near the New York City area, so I don't know how real this pandemic is to them. So, yes... under the right circumstances, I would invest. Trade CCL? Sure, I'll trade hubcaps, baseball cards, really anything you want to try to price. I'm good at it. Let's go.
I started writing this piece prior to the opening bell. The shares were trading with a $17 handle at that time. I just saw a $19 tick go by, so no, I am not going to buy any equity in the name this morning. Hence the perils of writing when one should be trading. My advice to anyone willing to pay $19 would be to sell covered calls in appropriate size against the position. At this point a trader could probably still get paid $2.50 for the September $22.50 calls. Just like buying the shares at $16.50 or so. They called away in September? So what? You're up 36%.
I think I would rather just sell the September $15 puts and hope the value just fades away. This morning those puts are worth a rough $2.25. The trader has the shares put to him or her at expiration? How's a net basis of $12.75 sound for the shares? Otherwise that's two and a quarter in the hip pocket.