Carnival is ready to sail without ‘Covid-19 health warnings’ (NYSE: CCL)
Carnival Corporation & plc (NYSE: CCL) is a multinational cruise line with global operations, with a significant portion of its total revenue generated in North America and Europe. Due to the pandemic, the CCL suspended guest cruise operations in March 2020, cutting its price by more than 60% from its peak in 2021. At the time of this writing, CCL has improved year-over-year revenue of 3,505 millions of dollars. However, this remains below its pre-pandemic level. Even with a disrupted operation, CCL has demonstrated its resilience by forecasting that net income will return to positive territory in the third quarter of 2022 and that the occupancy rate will continue to grow, finally reaching its historical level in 2023.
Unlike other companies that sold the majority of their assets to survive the pandemic and as a source of cash, CCL managed to maintain a trend of capacity growth. It benefits from strong forecasts from 2023 with less pressure on the inflated cost of inputs and a positive outlook for its continued recovery from the pandemic. Uncertainty surrounding the pandemic is beginning to ease, with new Covid-19 hospitalization cases declining in the United States and the CDC lifting its risk advisory for cruise travel.
CCL is cheap at its EV/Futures multiple of 3.61x and will offer new investors good risk-reward at today’s price.
Effects of the pandemic
Due to the pandemic, the company’s trend of increasing revenue has been disrupted. This has been a source of concern for investors, as the company has significant fixed expenses such as interest payments and depreciation and amortization that continue to accrue even when the company ceases operations. This has resulted in a downward trend in its net profit, which also affects its retained earnings. With its increasing level of debt, I am not surprised that CCL received a highly speculative rating of B1 in April 2021.
However, the company has managed to manage its obligations as shown below.
At the same time, we also managed lower operating costs, reducing our monthly Adjusted EBITDA losses by 40% since mid-2020; achieved a steady stream of capital raising, exceeding $29 billion; refinanced more than $9 billion of debt, improving interest rates; amended more than 100 agreements from different lenders; and successfully approached our maturity round through 2024, resulting in a consistent liquidity position exceeding $7 billion, integral to building stakeholder confidence. Source: Q4 2021 Earnings Call
Additionally, despite its paused operations, the company managed to improve its current ratio level to 0.74x above its 5-year average of 0.57x, and with its cash and cash equivalents higher at 6,414 million above its pre-pandemic level. I think it’s possible we’ll see an improvement in his current credit rating, especially with the least restriction to date and continued growth in his ability level.
Despite a good catalyst from the cruise travel industry, CCL continues to face temporary headwinds due to the pressure of inflated fuel costs and the adjusted no-fuel cost by ALBD due to unusual maintenance costs such as the dry docking and other related expenses regarding health and safety protocols. This resulted in a decline in gross margin, which is the company’s first negative gross margin in its history.
Additionally, despite management’s strong outlook that the company will start posting a positive result in its third quarter 2022 report, it still expects a negative number for its full fiscal year 2022. Management assures that this temporarily inflated cost will not recur in their next financial report.
We anticipate that many of these costs and expenses resulting in increased non-fuel adjusted cruise costs by ALBD will end in 2022 and not recur in 2023.
Like other companies, CCL has also shown its support for Ukraine and pulled its operations in Russia entirely, leaving a small part of its capacity at stake.
Now about the invasion of Ukraine. For the 4.6% of our capacity that was due to call at Russian ports for the rest of the year, we decided to pull out of Russia altogether and found attractive alternatives.
Despite this, CCL benefits from an upward forecast
Despite the period of inactivity during which the vessels were not sailing, CCL managed to avoid significant charges for depreciation. Surprisingly enough, he managed to improve the book value of his ships.
Moreover, despite the uncertainties related to the pandemic, the company continues to invest in improving passenger capacity.
With this growing passenger capacity and improved booking guidelines from management, in addition to less government restriction, there is no doubt that analysts’ 2022 and long-term revenue forecasts are achievable.
Another bullish catalyst is CLL’s analyst revenue forecast for 2023, which is higher than its 2019 figure of $20,825 million. Management expected higher EBITDA than in 2019, which was $5,457 million with an EBITDA margin of 26% for fiscal 2019. With total forecast revenue of $20.08 billion for fiscal 2023 and an expected EBITDA level of at least 26% each year, CCL will generate significant revenue growth in its EBITDA. This can snowball into growing cash flow if properly capitalized.
CCL is undervalued
In addition to its improved EBITDA outlook, CCL is trading at a huge discount to its peers.
CCL is extremely cheap compared to its peers with a rear P/S ratio of 6.34x compared to the peer average of 12.68x and a front P/S ratio of 1.59x. There is no doubt that CCL has a better balance sheet and a more secure capital structure than its peers with its trailing P/B ratio of 2.17x and its forward P/B ratio of 2.15x. At a BV per share of $9.05, I think CCL is cheap at the time of this writing and a target price of $38 is achievable.
Trading in a Strong Support Zone in 2008
CCL is currently trading at its 2008 Great Recession level, implying strong potential for support if held. Based on its current financial situation and rising capacity level, I believe today’s support level is strong and will provide investors with good risk-reward compared to its current 52-week low and higher high of 2020. A breakout of the pattern or its 50-day simple moving average will provide further confluence in my bullish thesis and investors should watch that. Its MACD indicator is showing bullish sentiment as we could see a potential bullish crossover in the next trading week.
CCL’s punished FCF is primarily due to its ongoing CAPEX spending. Its negative trend is expected to return to pre-pandemic levels.
In my opinion, CCL maintains its liquid balance sheet with only $1,580 million of debt securities maturing in 2022 and is now manageable at its current level of expected fiscal 2022 revenue. This temporary weakness will slowly abate and earnings could fluctuate more, but its solid capacity growth makes this stock worth the risk.
Thanks for reading and I hope everyone had a great March!