Given the slow resumption of cruises, CCL’s substantial liquidity and declining cash burn are important factors that highlight the company’s ability to operate through the end of FY21 despite weak revenue. At the same time, the planned issuance of an additional $1 billion in equity will reduce EPS. Based on these factors, the stock appears fully valued at just under 17-times our revised FY22 earnings estimate (we expect losses in FY20 and FY21), above the three-year average of 12 and below 7-30.
RECENT DEVELOPMENTS
On September 15, CCL reported preliminary fiscal third-quarter results. The adjusted net loss was $1.7 billion, down from adjusted net income of $1.8 billion. Adjusted 3Q results excluded a $937 million loss on ship sales and impairments, $3 million in restructuring expenses, and a $220 million loss on the repurchase of convertible notes. The loss reflects the ongoing suspension of cruises during the quarter. On a GAAP basis, Carnival lost $2.9 billion in 3Q20, compared to earnings of $1.8 billion in 3Q19. The adjusted per share loss was $2.36, versus earnings of $2.63 in 3Q19. Revenue was $700 million, down from $6.5 billion a year earlier. Regarding fiscal 2021 bookings, CCL had $2.4 billion in total customer deposits at the end of 3Q20. Bookings for the first half of the year remain modest and reflect the gradual phase-in of cruises. However, for the second half of fiscal 2021, bookings are on the rise despite limited advertising and marketing spending. FY19, revenue increased 10% to $20.8 billion, while adjusted EPS rose to $4.40 from $4.26. Management had forecast earnings of $4.23-$4.27 per share, while the consensus estimate had called for $4.33 per share.
EARNINGS & GROWTH ANALYSIS
The outlook for Carnival remains mixed, with positive and negative news from the company’s different subsidiaries. On the one hand, on September 17, Carnival’s P&O Cruises said that it had suspended cruises until early 2021 due to travel restrictions in the U.K. On the other hand, the Costa line resumed cruises to Italy on September 6, and the Aida line is expected to resume operations in early fall. We are widening our FY20 loss estimate given the company’s weak 2Q and 3Q results and management’s comments, as well as P&O Cruise’s announcement that it will not resume cruises until early 2021. We now expect a FY20 loss of $7.20 per share, compared to our prior loss forecast of $4.00 per share.
FINANCIAL STRENGTH & DIVIDEND
CCL dropped from Medium-High in our ranking system. Standard & Poor’s rates the company’s debt as BBB+ with a stable outlook. For fiscal 4Q20, Carnival estimates a cash burn rate of $530 million, down from $770 million in 3Q20 and in line with management’s forecast for average second-half cash burn of $650 million per quarter. This forecast includes ongoing ship and administrative expenses, capital expenditures, and interest expense. At the end of the third quarter, customer deposits totaled $2.4 billion, most of which are future cruise credits. Carnival and its lenders have agreed to postpone the repayment of some of the company’s maturing debt. CCL has been increasing its liquidity. Since March, it has raised more than $12 billion through several transactions. These transactions have mostly been long-term debt, but CCL also plans to issue equity. On September 15, 2020, the company filed a prospectus to raise another $1 billion through an at-the-market equity offering. Moreover, CCL is selling 18 of its ships (12% of FY19 capacity). Carnival has also reduced the number of ships scheduled for delivery this year to two (shipbuilders cannot scrap a half-built ship) from four. Over the next two years, the company expects to take delivery of just five of the nine ships initially scheduled for delivery. These changes will lower both fixed costs and fuel expense.
MANAGEMENT & RISKS
In July 2013, Arnold W. Donald, a CCL director for 12 years, replaced Mickey Arison as CEO. Mr. Arison continues to serve as chairman. Carnival and other cruise lines face substantial risk from the coronavirus pandemic, as well as from terrorism or the threat of terrorism. The company’s results could also be hurt by heightened safety concerns or rising fuel costs.
COMPANY DESCRIPTION
Carnival Corp. is a global cruise and vacation company primarily serving North America, the United Kingdom, Germany, southern Europe and South America. The company’s portfolio of cruise brands includes Carnival Cruise Lines, Princess Cruises, Holland America Line, P&O Cruises, Seabourn, Ocean Village, Costa, AIDA, Iberocruceros, and Cunard Line.
VALUATION
CCL shares fell 11% following the announcement that the company would issue $1.0 billion in new equity at market prices and sell 18 ships—reflecting concerns that the additional equity issue would dilute EPS and that the ship sale signaled weak long-term demand. CCL is trading at just under 17-times our revised FY22 earnings estimate (we project losses for FY20 and FY21). weak bookings FY20 and part of FY21.
