Why Carnival Stock Could Remain Seasick, Even as Its Business Sails in Smoother Waters

© Provided by The Motley Fool Why Carnival Stock Could Remain Seasick, Even as Its Business Sails in Smoother Waters

After a long pandemic that anchored the cruise operator Carnival Corp. (NYSE: CCL), the company looks poised to start sailing in calmer seas. Travelers are booking cruises in record numbers, and the company appears positioned to earn record revenue in 2023.

However, one cannot deny that the pandemic left the company with an impaired balance sheet that will take years to repair. Thus, investors need to look at Carnival’s stock in a different light than the company.

Carnival’s recovery

Amid rising demand for cruises, investors can feel confident that Carnival has turned the corner. In the first quarter of fiscal 2023 (ended Feb. 28), revenue reached $4.4 billion, or 95% of 2019 levels. Booking volumes also came in at the highest levels in company history.

Thus, it should come as no surprise that the company forecast occupancy of at least 100% by the summer (which means at least two people per room), setting Carnival up for record revenue for the year.

Moreover, other cruise line stocks, such as Royal Caribbean Cruises and Norwegian Cruise Line, have also benefited from high levels of bookings. It appears the industry has benefited from a “revenge travel” trend, where cruisers seek to take the trips they could not take during the lockdowns.

The legacy of the pandemic lingers

Unfortunately for Carnival and its peers, investors face a considerable lag time between Carnival’s business recovery and the point where it will help its investors.

For one, the improvements have not yet translated into profits. In the fiscal first quarter, ended Feb. 28, the company still recorded a net loss of $693 million. Consensus estimates also point to a net loss for the year, with no quarterly profits expected until at least the fiscal third quarter. This means the company will likely have to reduce cash reserves to meet expenses.

Moreover, it holds those cash reserves because staying in business during the pandemic took its total debt to $36 billion. That’s up from just over $11 billion in Q1 of fiscal 2019, right before the pandemic shutdowns began. The debt also represents a tremendous burden for a company with $6 billion in shareholder equity, the company’s value after subtracting liabilities from assets.

Additionally, meeting the interest payments is a challenge of its own. Carnival paid $539 million in interest in fiscal Q1 alone. That cost will remain a drag even when Carnival finally returns to profitability, and in this higher interest rate environment, it will have to refinance the debt it cannot repay at tougher rates. That factor makes it harder to reduce the debt burden.

CEO Josh Weinstein has no plans to issue more shares to cover this expense, and holding to that intention should help shareholders conserve their Carnival investments. But even when net income turns positive, investors should assume that Carnival will devote most of its capital to debt repayment for years to come.

Assessing Carnival stock

Given that crushing debt load, investors will likely not benefit from Carnival’s recovery. Even as record passenger loads improve Carnival’s financials, the company faces a tremendous debt burden that will claim nearly all of the company’s spare capital for the foreseeable future.

Investors also should remember that they have numerous options when choosing investments. Considering those options, investors will probably turn to healthier stocks where massive debt levels do not hamper growth potential.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.