🚢 Will Carnival Cruise To Profitability?

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🚢 Carnival: Party Or Pooper?

Carnival Corporation’s (CCL) Q1 bookings are the strongest in two years. The world has reopened, and occupancy limits are relaxed. But it does not expect to be profitable this year. Before Carnival and peers could hope to reignite investor sentiment, multiple threats loom. What lies ahead?

Big Player, Bigger Challenges

Cruise operators witnessed eulogies at the start of the pandemic. Operations resumed in November last year after 18 dormant months. However, occupancy has not normalized.

Carnival is the largest global cruise operator. It had a 37% revenue share and ferried 42% of total cruise passengers in 2021. With no source of cash generation during the pandemic, it turned to debt and equity issuances to keep itself afloat.

The company finds itself in the dock for mismanagement of Covid cases on board a ship last month, despite setting up Standard Operating Procedures to keep infections at bay. Over 100+ passengers tested positive on board another Carnival ship in April.

Occupancy levels are improving despite multiple outbreaks. Carnival, which operates nine cruise brands, has 91% of its fleet sailing again. Ship occupancy was 69% in May compared to 54% in February. Those levels are approaching 80% in June. Overall bookings doubled from Q1 and are the strongest since the pandemic began.

Investors cheered the improving occupancy ignoring that Carnival has remained loss-making since the pandemic. The company has lost $25B over the last 10 quarters. It does not see profits for this quarter as well as in 2022.

Key Highlights From Q2:

  • Revenue: $2.4B Vs $2.83B expected
  • Loss Per Share: $1.64 Vs $1.14 expected

A ship where two people stay in the same cabin is considered 100% occupancy. More people in a cabin is more than 100%. CEO Arnold Donald wants Carnival to aim for 110% occupancy levels. That said, Carnival does not expect normal occupancy levels until 2023. Consumers currently demand “close to home” voyages, while European demand has been challenging.

Swelling Debt, Swelling Worries

Carnival faces newer challenges even before it fully recovers from the pandemic. It currently has $36.23B in total debt, significantly higher than the total pre-pandemic debt of $14.4B.

The debt-to-equity ratio increased to 351.4% from 59.4% in 2019. Quarterly interest expense or the amount needed to service debt has increased 7x from pre-pandemic levels to $368M in Q2 2022. This is compared to an average of $50M three years prior. The company sees Interest expense for 2022 at $1.4B.

Rising debt has left cruise operators with high net debt-to-EBITDA ratios. Carnival is likely to end 2022 with a net debt to EBITDA ratio of 40.8x, compared to rival Royal Caribbean’s 23.5x.

Carnival continues to burn cash even after the resumption of operations. It burned $4B in free cash flow in Q2, with cash from operations remaining negative. Analysts have questioned the company’s debt repayment ability due to the lack of cash-generating potential. For the rest of 2022, Carnival faces $1.57B in debt repayments, with numbers rising to ~$3B in 2023, $4.8B in 2024, $4.5B in 2025, and $4.6B in 2026.

Traffic to websites of leading cruise operators is slowing. Purchasing trends have weakened over the last two months. The Moodie Davitt Report, which tracks web visits and conversion trends for cruise operators, showed conversions declined 4% in April and another 8% month-on-month in May. This follows a 50% growth in March and 35% in February.

Further insights show many potential cruise customers are still concerned about the safety of cruises due to past quarantine regulations and mass outbreaks onboard. Current economic conditions and inflation pressures add to the apprehension.

Carnival shareholders have seen significant dilution since the pandemic. The company has been issuing new shares to finance its activities and stay afloat. The number of shares outstanding at the end of 2019 was 684M which has now increased to 1.13B, a 66% dilution.

Shares have halved this year and are down 62% from their 52-week high of $27.5. The company trades cheaper compared to peers on the valuation front. On a current year price-to-sales basis, Carnival trades at 6.2x, compared to Royal Caribbean’s 6.6x and Norwegian Cruise’s 7.2x.

Carnival’s ship may have just begun to sail but is already encountering a turbulent sea. For starters, it will have to resolve questions regarding its solvency by coughing up some much-needed cash without further elevating the already inflated debt levels. It remains to be seen whether Carnival manages to come to the party or the challenges mentioned above end up playing party pooper, as has been the case over the last three years!

Market Reaction
CCL ended at $10.33, down 2.09%.

Company Snapshot 📈

CCL 10.33 -0.22 (2.09%)

Analyst Ratings (21 Analysts) BUY 33%  HOLD 48%  SELL 19%

Newsworthy 📰

Under The Lens: US FTC sues Walmart for allegedly allowing money transfer services for fraud (WMT -1.38%)

Support: Disney’s board backs CEO Bob Chapek, extends his contract for three years (DIS -0.71%)

Transition: Pinterest CEO Ben Sibermann is stepping down, Google Commerce executive to take top job (PINS -4.97%)

Later Today 🕒

  • Bed Bath & Beyond Inc. Earnings (BBBY)
  • Culp Inc. Earnings (CULP)
  • General Mills Inc. Earnings (GIS)
  • McCormick & Co. Inc. Earnings (MKC)
  • Paychex Inc. Earnings (PAYX)
  • 6:00 PM IST: GDP Revision

Today’s Fun Fact

In 1927, UPS was one of the first companies in the US to offer their employees shares of the company. Today, UPS is primarily owned by its employees

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