Carnival Corporation [LON:CCL], the Southampton-based cruise liner operator, is one of the FTSE350’s best performing shares this year.
The dual-listed company, which also can be found on the New York Stock Exchange under the ticker ‘CCL’ opened trading on the LSE this week (2nd October) at 997.22p. Over one year Carnival returned 85.2% and over the year-to-date 68.4%. The company has a market capitalisation of GBP1.45bn
However, casting one’s eye back a bit further, this time two years ago shares in Carnival were trading hands at 1,710.6p some 41% better than today’s price, and over five years the difference in pricing was 78% ahead at 4,548p. Carnival hit its lowest point, 614.8p, in April 2020, during the throes of the Covid lockdown, where cruise liners took on the apparition of plague ships.
Although it seems a long time ago now, in the early days of the Covid-19 pandemic, cruise ships were seen as a disease vector, typically being crowded semi-enclosed areas, full of people from different places, that offered increased exposure to new environments, and boasted limited medical resources. Early in the crisis, the British-registered Diamond Princess had a major outbreak of coronavirus on board, and the ship was forced into quarantine at Yokohama in Japan for about a month. Of 3,711 passengers and crew, around 700 people became infected and nine people died.
Carnival Cruises was significantly affected by Covid, and, like other cruise operators, had to cancel all its sailings from March 2020. It saw 55 Covid-related deaths on its liners during the pandemic, and by September 2020 had announced that it was disposing of 12% of its global fleet – or 18 vessels and had already sent five ships to the scrapyard.
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Anni horribiles for Carnival
Moreover, Carnival also mothballed the delivery of several new ships on order as part of a corporation-wide cost cutting plan. The company reported a USD1.7bn (GBP1.4bn) 3Q20 loss. A quarter later (end-November 2020, published 11th January 2021) the company reported that it was increasing its disposals to 19 ships and saw a USD1.9bn loss for the quarter, but had USD9.5bn in cash as a fall-back.
It’s been a considerable task to row-back from where it was during the Coronavirus pandemic but given its last set of results in September for 3Q23, it’s not done a bad job and is now approaching a full head of steam. The company reported net income of USD1.18bn and adjusted earnings of USD2.2bn, which both exceeded previous guidance from June.
Most presciently third quarter revenues hit an historic high of USD6.9bn with booking volumes for 3Q23 and for the month of September at an elevated level and customer deposits running at USD6.9bn. The company also managed to cut debt by USD4bn.
Historical highs
The company’s CEO, Josh Weinstein said in a statement: “We are maintaining strong momentum and continuing to build demand through our improved commercial execution. Booking volumes during the quarter were running nearly 20% above 2019 levels and multiples of our capacity growth, which has continued into September. This has helped us extend the booking curve even further, with our North American brands exceeding historical highs and our European brands essentially achieving pre-pause levels.”
The recovery has been astonishing, but does the share price still have room for manoeuvre? Well, it’s unlikely that Carnival will get back to its 2018 levels any time soon. The company still has a big coronavirus hangover. During the lockdown, the company, and its peers did not receive any funding from the US’ CARES Act – the US government’s fiscal coronavirus stimulation package – as its ships were registered and sail under foreign flags, to manage its tax liabilities in the US, although it did qualify for USD700m from the UK government’s Covid Corporate Financing Facility, according to Bank of England; despite cutting its UK workforce by almost 30% and asking the remaining employees to take up to 20% pay cuts during the pandemic.
Instead, the company resorted to the capital markets for funding, and managed to raise USD23.6bn from debt and equity investors in less than 12 months, propelling it to become one of the biggest issuers in the US junk bond market, which included a USD4bn bond issue in April 2021 following a USD3m loan a few weeks earlier. The Fed helped out by buying Carnival’s bonds at a low price. Net debt is still north of USD30bn.
Demand side strength
Ultimately, the holiday and leisure company will have to pay back this cash, so investors shouldn’t be expecting any dividends any time soon, but given the surge in demand for Carnival’s services post-lockdown, the company is managing to service its debt. In a later interview Weinstein said: “You know, on the demand side, all we see are our green arrows going up. You know, we’ve got record-booking levels. We’re 10 points better booked today than we were a year ago looking out for the next fiscal year. On top of that, we’re booked at higher prices.”
However, it was not all plain sailing for Carnival, as at the same time the cruise liner company issued a fourth quarter earnings outlook that missed analysts’ expectations as higher fuel and currency costs weighed on its operations. Adjusted earnings before interest, tax, depreciation and amortization costs will be USD800m to USD900m in the 4Q23. Analysts had expected USD950m.
The plan to fix the ills of the last few years is a three-year programme geared toward slowing growth, boosting margins, and paying down debt. Key to this is the company’s objective to grow EBITDA per available lower berth day by 50% over today’s figures.
That’s a punchy target! However, Carnival still has a lot of berths to fill from the time before Covid, and although it has been filling up more of its ships, at a higher price per passenger, it too has had to deal with higher costs, including wages, dry-docking and fuel, but the long road back has begun. The company said it is expecting 100% occupancy this year, and if it can keep its costs under control, profits should continue to follow.
The company manages nine cruise line brands: Carnival Cruise Line; AIDA Cruises; Costa Cruises; Cunard Line; Holland America Line; P&O Cruises; P&O Cruises Australia; Princess Cruises; Seabourn and one cruise experience brand operating a combined fleet of 91 ships.
There are a lot of things that Carnival has to fix, but it is notable that before the pandemic Carnival was trading at a multiyear low valuation, as at the time there were questions about the strength of the economy, Carnival’s net debt position, and analysts’ views that Carnival was so large that it had probably hit the peak of its growth trajectory.
Jumping into investing in cruise ships comes with its risks. The industry is still quite fragile, and Covid or another pandemic could still be lurking around the corner. Debt and relief repayments remain high and costs, especially fuel and labour, are still a concern. Moreover, the environmental impact of cruising remains high. However, if you are willing to take a risk, there is potentially a lot of upside on this stock.
