Sinking Ship or Undervalued Gem?

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Cruise lines were one of the worst-hit sectors at the height of the pandemic.

With travelers stuck in their homes, these floating cities idled at the ports.

A couple years later, the economy is running at full tilt. But many cruise lines are trading below their pandemic lows.

Financial pros began scoping Carnival Corporation (CCL) as value stocks came into fashion, making it their most searched cruise line stock over the last month. 

Are these big-money whales thinking about jumping in, or has the ship sunk?

Carnival Corporation’s Business

Carnival Corporation (CCL) owns and operates the world’s largest cruise line portfolio. 

Its brands include Carnival Cruise Line, Princess Cruises, Holland America Line, Seabourn, P&O Cruises, Costa Cruises, AIDA Cruises, Cunard, and Holland America Princess Alaska Tours.

Carnival has a fleet of 92 ships visiting 700 ports worldwide under normal operations and totaling 223,000 lower berths. 

It breaks down its revenue by passenger tickets and onboard/other. 

As you might expect, 60% of sales comes from tickets. 

Though Carnival’s business took a hit during the pandemic, it didn’t get a bailout or any stimulus money because the company wasn’t formed in the United States. 

It had to rely on debt financing to keep its business going. Thankfully, the Fed stepped in to make debt markets solvent and cheap for Carnival and other struggling companies.

And things have been looking up for Carnival. Revenues increased nearly 80% in the third quarter of 2022 compared to the same quarter last year. To keep up with debt payments, the firm completed a $1.3 billion public equity offering of common stock during Q3 2022. 

Financials

CCL’s sales plummeted after steady growth prior to the pandemic. 

COVID nearly wiped out its business. 

Shares went from $51.94 in January 2020 to $7.90 two months later. While they rallied above $30 per share in January 2021, revenues haven’t improved, and the stock is now trading lower than its pandemic lows. 

In 2016, the firm was doing $16.3 billion in revenues; in 2021, they were down to $1.9 billion. Its 12-month trailing revenues are $9.6 billion. 

But the firm is drowning in debt. It has $7 billion in total cash and $35.2 billion in total debt. 

Liquidity is a concern at a current ratio of 0.65x. Furthermore, the firm has -$1.9 billion in operating cash flow. 

Valuation

There are three other publicly traded cruise lines: Royal Caribbean Cruises (RCL), Norwegian Cruise Line Holdings (NCLH), and Lindblad Expeditions Holdings (LIND). 

None of them are profitable. CCL trades at the lowest price-to-sales ratio at 0.81x. The closest competitor is LIND at 1.26x. The farthest is RCL at 2.37x. 

CCL trades at a price-to-book ratio of 1.02x, which is the best in its category. But it also has the highest long-term debt at $28.5 billion. 

The most worrisome metric is its price-to-cash-flow ratio.

With the exception of LIND, none of the cruise lines generate positive cash flow from operations.

Profitability

CCL boasts a gross profit margin of 25.5%, notably better than RCL at -1.03% and NCLH at -26.2%. 

However, its net income margin is dismal at -73.98%, and as is its operating margin of -50.38%. 

While its competitors aren’t doing much better, they aren’t making money either. 

For example, CCL has an EBITDA of -26.8%, RCL is at -36.9%, NCLH is at -71.6%, and LIND is at -18.8%. All the companies in the group have negative returns on equity and on assets. 

Growth

After a horrendous 2021, growth has returned to the space. CCL’s year-over-year revenue growth has been 1,368%, RCL’s 4,914%, NCLH’s 9,870%, and LIND’s 1,466%. 

But the million-dollar question is can these firms continue to grow in a difficult economy while trying to service their massive debt? 

For example, CCL has interest expenses equal to 10% of its revenues. Last quarter, the firm paid $422 million in interest expenses. 

Our Opinion 2/10

A weak economy and a mountain of debt make CCL a bad investment at the moment. 

The worst thing you want to do is try to catch bottoms in a bear market. 

We’d stay far away from this stock right now. 

While buying here might work out, now is not the time to be a hero.