Amid Tough Times for Cruise Lines, Don’t Buy Carnival Stock
What lies ahead for Carnival (NYSE:CCL) stock? The cruise-line operator remains in limbo, as the Covid-19 pandemic continues. On Jan. 6, the company announced that it was extending the moratorium on cruise ships sailing from the U.S. until March 31.
Back in November, Carnival’s shares rallied on game-changing vaccine news. Soaring from $13 per share to $24 per share, it closed at $20.79 on Friday. Investors have priced in a cruise-sector recovery. But, since the vaccine rollout is taking longer than expected, it’s hard to be confident that we’ll get back to the “old normal” by the end of 2021.
Granted, you can say this pessimism is still largely factored into Carnival’s shares. CCL stock may have rallied more than 50% since November. Yet it’s still down more than 50% from its pre-pandemic price levels.
However, considering it will be many years until the company’s earnings bounce back to their pre-outbreak levels, we’re a long way from the shares fully bouncing back. And investors should remember that the company has sustained big losses and taken on significant debt to stay afloat. That makes it all the more challenging for the shares to eventually exceed $50, where they traded before the pandemic.
So what’s the call? There’s little reason to dive into this or any other cruise stocks right now. I’m not saying that Carnival is heading lower. But, with the stock’s additional gains limited, investors should look elsewhere for a Covid-19 recovery play.
The Waters Are Still Choppy for CCL Stock in 2021
As I mentioned above, the U.S. has extended its suspension of outbound cruise ships until March 31. Coupled with the disappointing rollout of vaccines in America, that development shows that investors were wrong to bid CCL stock and its peers higher after last November’s developments.
Admittedly, the rally of the shares of Carnival, Norwegian Cruise Line Holdings (NYSE:NCLH), and Royal Caribbean (NYSE:RCL) was somewhat justified. The launching of the vaccine rollout in late 2020 set the stage for a recovery by the sector in mid-to-late 2021.
But now a 2021 recovery seems questionable at best. With Carnival’s CFO mentioning on the company’s last conference call that it has sufficient liquidity for 2021, even in a “zero revenue environment,” the company is trying to roll back investors’ expectations. Even if cruise ships set sail sometime this year, the aforementioned hurdles may prevent the company from offering cruises during the summer, which is the industry’s “busy season.”
Cruises could resume sooner than anticipated. Yet, even if the vaccine rollout accelerates, Covid-19 restrictions are rolled back, and “pent-up demand” for cruises surfaces in the second half of 2021, CCL stock may not climb much because this potential outcome may already be priced into the shares.
A Medium-Term Rebound May Already Be Priced In
On Jan. 11, InvestorPlace columnist Ian Cooper wrote a bullish piece on Carnival stock. Namely, he contended that, even with the company’s current headwinds, the worst may already be priced into the shares. Cooper noted that the CDC has already developed a plan of action to allow cruise lines to safely operate in the future.
But, more importantly, the bull case for Carnival hinges on the “pent-up demand” factor. In other words, bulls believe that there are plenty of cruise-ship enthusiasts chomping at the bit to set sail whenever cruise ships resume sailing. I concede that these factors could help drive a rebound by the sector much sooner than expected.
The CCL stock price, however, more than reflects a recovery. As a Seeking Alpha commentator recently discussed, the shares have already reached their average historical mean valuation, based on analysts’ average 2023 earnings estimate for Carnival.
Meanwhile, Carnival has taken on high levels of debt during the pandemic. Simply put, it’s going to be a long time before CCL stock reaches its prior price levels. Even getting back to $30-$40 per share in the near-term could be challenging.
The Bottom Line
Carnival is still riding out the storm. And, unlike airlines and some other sectors, cruise operators won’t return to the “old normal” for a very long time.
What does this mean for those interested in CCL stock? In 2021, the shares probably won’t climb much above their current levels. With the shares’ gains limited for now, look elsewhere for high-risk, high-potential opportunities.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.