The travel industry suffered greatly during the height of the COVID pandemic. Travel bans, quarantines, and stay-at-home orders made virtual connections safer and more practical than in-person trips. Global tourism collapsed in 2020, putting thousands of companies and millions of jobs at risk.
Airlines, hotels, car rental agencies, travel agents, and restaurants struggled. The very existence of most cruise lines came under threat when governments issued No Sail orders in March 2020.
Even after the US No Sail order finally expired, the cruise industry was required to operate under Conditional Sail orders, and the Centers for Disease Control and Prevention (CDC) warned against cruise ship travel.
It wasn’t until the first week of July 2021 that major cruise lines like Carnival and Royal Caribbean were able to resume operations.
Even then, extensive health and safety protocols discouraged would-be travelers, and demand for cruises remained at record lows. The only option for cruise lines to keep bankruptcy at bay was taking on debt – and they did, borrowing huge amounts of cash to cover basic operating expenses.
When investors saw the state of the cruise industry, they abandoned ship. Carnival stock, which had been trading above $40 per share just before the market crash of 2020, fell below $10 per share. Though it saw small rallies when various restrictions were lifted, it never returned to pre-COVID levels.
Today, Carnival stock trades below $7 per share – its lowest price since the early 1990s. Carnival stock is down nearly 70 percent year-to-date, and it has dropped 90 percent from its 2018 peak. Will Carnival stock recover? What are the risks of buying Carnival stock now?
Why Did Carnival Stock Drop (Again)?
Of all the travel-related industries, cruise ships were most vulnerable during the pandemic. As with hotels and airlines, it is expensive to own and maintain facilities and equipment. Those costs are fixed whether or not trips are booked.
However, unlike hotels and airlines, cruise ships cater exclusively to leisure travelers. Even after the CDC allowed the ships to resume operations, few vacationers wanted to be confined to small spaces with hundreds of other people.
Carnival went through roughly $650 million in cash each month during the No Sail period, and from early 2020 to present, the company’s debt load tripled. This wasn’t fiscal mismanagement – the loans were a must if the cruise line was to survive.
Unfortunately, that now leaves Carnival with billions in debt, and those loans are coming due faster than Carnival can accumulate cash to pay them.
In the fourth quarter of 2022, the company has a $991 million payment to make, followed by $2.4 billion in 2023, and a total of $4.9 billion in 2024. All in all, by the end of 2026, Carnival must repay $16.9 billion in debt. Based on the most recent financial reports, the numbers just don’t work.
The year before the pandemic, Carnival reported $5.5 billion in operating profits. A full $5.4 billion went to property and equipment expenses – nearly double 2017’s $2.9 billion in expenditures. In the best of times, Carnival’s free cash flow was just a few billion dollars, and this is hardly the best of times.
Carnival’s fiscal third quarter 2022 results included a negative free cash flow of $882 million. That’s chipping away at the company’s cash on hand, which totaled $7.1 billion for the same period. While Carnival can stay current with debt payments short-term, it’s not clear how long it can stay afloat.
Investors are worried, and no one wants to buy Carnival stock. After the most recent earnings report, more shareholders decided to sell their Carnival stock, which caused its price to decline an additional 23 percent. Many question whether it is even possible for Carnival stock to recover given the current economic environment.
What Are The Risks Of Buying Carnival Stock?
The economic challenges facing all consumers and businesses – increasing energy costs, inflation, and rising interest rates – will be especially difficult for Carnival to overcome. As with airplanes, fuel is a major expense for cruise ships – and the cost of fuel doesn’t decrease with fewer passengers on board.
Inflation puts upward pressure on wages and causes increases in other operating expenses. Meanwhile, it reduces disposable income for consumers, making them less likely to book expensive vacations. Leisure travelers are staying closer to home or choosing more affordable vacation options, and cruise lines aren’t in a position to compete by discounting prices.
Finally, central banks around the world are increasing interest rates to get inflation under control. That means debt is more expensive, which impacts Carnival in two ways. First, some of Carnival’s loans have variable interest rates. As the Federal Reserve raises interest rates, existing debt costs will go up.
Second, Carnival may have to refinance a portion of its debt rather than repay it. When it does, the new interest rate will probably be higher – perhaps substantially higher. That isn’t promising, considering the company is already feeling financial pressure with its current interest rates.
The combination of inflation and increasing interest expense will make it more difficult for Carnival to accumulate the cash it needs to pay down its debt. The longer the debt remains outstanding, the more interest compounds, creating a downward spiral into more severe financial distress.
All of that is ominous enough, and it doesn’t consider other potential threats. Additional developments in the Russian invasion of Ukraine could bring new challenges, and there is the risk of a new strain of COVID or some other virus disrupting travel again.
All in all, Carnival is in a precarious financial position, even if nothing else goes wrong. Sometimes, big profits can be made by taking on high-risk investments, but now is not the time to buy Carnival stock. The risks outweigh potential rewards by a large margin, and very few market experts believe Carnival stock will recover in the foreseeable future, if at all.
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