Carnival Stock Is in Murky Waters as the Future of Cruise Lines Remains Sketchy

Carnival (NYSE:CCL) stock is up 36% this year, showing some signs of life. But Carnival is still a very risky company that’s operating in a very risky industry.

In an effort to squeeze out a few months of sailing during the traditional summer season, cruise lines are rolling out their itineraries  But everything will still come down to final approval from the U.S. Centers for Disease Control and Prevention (CDC) and President Joe Biden.

In recent months, there was hope that cruise ships could resume sailing out of U.S. ports by mid-July. The CDC has been preventing cruise lines from sailing out of U.S. ports since March 2020, in an effort to check the spread of the novel coronavirus.

The last few weeks have not been encouraging for the cruise sector. The CDC has unveiled a long list of requirements for cruise operators that could make it difficult for them to restart cruising from U.S. ports in the near-term or operate cruises with any degree of normalcy in the longer term.

For instance, on cruises, sunbathers will have to wear masks even when lounging outdoors in bathing suits by pools. These kinds of requirements are why industry insiders are not pleased with the CDC.

Meanwhile, Carnival, in particular, has been struggling for awhile. In the last five quarters, the international cruise operator’s results have come in  below analysts’ average estimates four times. Against this backdrop, along with Carnival’s huge debt load,  it’s difficult to recommend buying CCL stock.

Many InvestorPlace columnists feel the same way. I recommend reading the articles by Will Ashworth and Chris Tyler on CCL stock. They provide excellent insight on how best to chart and invest in this name.

Regardless, the writing is on the wall for Carnival; there are still several months before CCL stock will become a viable investment again.

CCL Stock and the Cruise Sector

Covid-19 hit the cruise industry like a ton of bricks. If there was ever a crisis tailor-made to hurt the sector, it was this one. At the start of this crisis, cruises became floating coronavirus “super spreaders.”

Therefore, one can understand the trepidation of the CDC. But its attitude has severely damaged the prospects of big players in the sector like Carnival, Royal Caribbean Cruises (NYSE:RCL),  and Norwegian Cruise Line Holdings (NYSE:NCLH).

However, Carnival cannot control these issues. What it can control, though, to some extent is its own performance. As you can see from the chart above, the cruise line is struggling on that front.

The company’s debt, its number of outstanding shares, and its interest costs have surged. This combination of increasing debt and equity is a toxic cocktail that most investors will want to avoid.

The company’s latest earnings report was no different. Carnival reported a GAAP net loss of $2.0 billion for its fiscal first quarter of 2021, a steep drop from a loss of $781 million during the same period a year earlier. The company’s loss per share of $1.79 was 16.3% below analysts’ average outlook.

In addition, Carnival highlighted its efforts to raise cash during the quarter through a mix of debt and equity. It is heartening that the company ended Q1 with $11.5 billion of cash and short-term investments. However, as I indicated earlier,  those funds come with a heavy price: the massive dilution of shareholders and high interest payments.

We Can’t Know the Future

Most of the time, it is difficult to predict the future. It’s particularly challenging to analyze a company like Carnival, which is facing tremendous short-term challenges.

Its management team deserves high marks for ensuring that the company will remain afloat during this difficult period and for lowering its cash burn rate. Nevertheless, surviving and thriving are two different things.

The company is firmly focused on recovering in 2022. And in Q1, Carnival’s booking volumes for all future cruises were almost 90% higher than in the previous quarter. Cumulative advanced bookings for FY22 are ahead of 2019 levels, and FY22 reservations will likely only grow going forward.

But the larger point remains that Carnival is still quite a long way from becoming healthy again, especially with all the debt that it has taken on. Meanwhile, there are plenty of turnaround plays and dividend stocks that are safer than CCL stock.

In an effort to get a more nuanced perspective on the matter, we asked James Angel, associate professor at Georgetown University’s McDonough School of Business, the following:

“Cruise companies have criticized recently released CDC guidance for cruise lines for being overly restrictive. As a result, many make moves to base their operations in the Caribbean and even threaten to leave the U.S. entirely. How will cruise stocks such as CCL, RCL, NCLH, etc., move in the coming weeks and months? How should investors expect these stocks to perform over the summer season?”

In response, he said, “The cruise line stocks will be very volatile. They will rally on any glimmers of good news about the end of the pandemic, and fall precipitously when the news is bad. Buckle up your seatbelt for a wild ride.”

The Bottom Line on CCL Stock

There are several recovery plays out there that are interesting. But unfortunately, Carnival and the other cruise operators will not thrive in the near future.

Even if cruises set sail, the CDC’s high number of requirements is bound to irk consumers, leading to them staying away from cruises until the pandemic disappears completely. And I have not even mentioned the long-term implications of this crisis for cruise operators.

All things considered, I will happily miss the boat on Carnival.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.