Debt and Economy Loom Over Carnival Cruise Lines

Inflation may do to Carnival Cruise Lines (NYSE:CCL) what the pandemic could not, force the world’s biggest cruise line into bankruptcy.

That would be sad because in some ways things are picking up. Carnival is expected to report $2.81 billion in revenue for the quarter ending in May, when it next reports June 27. Losses are expected to be $1.13/share, over 30% less than in the last quarter.

But with fuel oil prices skyrocketing, along with interest rates, it’s hard to see clear sailing. That’s why the stock’s price has been cut in half this year, and it’s down 30% in just the last month. It opened June 14 below $10/share, a market cap of $11.7 billion.

Cash Crunch

When the pandemic started, and after CCL stock fell from $50/share to $12, I warned that investors should be “prepared to lose everything” if they bet on the company. While things looked better a year ago, as I called Carnival a long Covid survivor, shares never left the dock. Carnival’s 2021 low, reached in December, was a little over $18/share.

Carnival is the weakest of the three big cruise lines because it piled on debt buying new ships when times were good. Its size forced it to buy more debt to stay alive in 2020. It ended fiscal 2022 with almost $30 billion of long-term debt. Carnival piled on more in the February quarter.

CEO Arnold Donald won praise for steering the company through the pandemic, but cash flow is tight. The company burned through $2.5 billion in cash during the February quarter, after putting $2.7 billion into capital investment. Debt is now costing AAA credits what Donald paid for Carnival’s pandemic-era loans, and the stock’s collapse means new equity won’t come in either. The company ended February with about $9 billion in cash and securities on the books.

Morgan Stanley (NYSE:MS) is now among those warning of a cash crunch, as Donald tries to pay interest in the face of what increasingly looks like a recession. Even the forecast of $1 billion in operating profits during the current summer season isn’t bringing out buyers.

Any Hope?

Cruise line executives talk about demand rising to pre-pandemic levels. Before the pandemic Carnival was booking more than $20 billion in revenue each year. If it could do that now its problems would be over.

This has some analysts, like our Faisal Humayun, seeing Carnival as an attractive stock below $10, where it’s currently trading. But demand for cruises may be weakening, warns Bank of America (NYSE:BAC), as consumers prepare to hunker down in the face of an uncertain future. Carnival has had to cut prices even as its costs rise.

Generally, analysts have been running away from CCL stock. Tipranks now counts just 12 Carnival analysts, and only two say buy it. Four are telling investors to sell, even at today’s depressed levels.

The Bottom Line on CCL Stock

It’s hard to be optimistic about anything when there’s a war crimping the global fuel supply. It’s hard to look forward to a winter vacation when you look at your own living costs rising.

Carnival depends on joy to keep its cruise lines operating. These include Princess, Holland America, AIDA, Cunard, Costa, P&O, and Seabourn, in addition to the flagship line. There’s not much joy in the world right now.

The hope of bulls was that, as the pandemic ebbed, Carnival revenues and operating profits would rise to pre-pandemic levels and its huge debts could be paid. That may prove impossible now. Cruising will survive, but an orderly bankruptcy that wipes out equity holders and forces bondholders to take haircuts could come this winter.

On the date of publication, Dana Blankenhorn held long positions in BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.