Carnival Is Still a Long Way From Home

It’s been a few months since I last wrote about Carnival Corp.  (CCL) , a poster child for what can happen when a company has to make major changes to its capital structure. In Carnival’s case, these changes, which included massive increases in both debt and equity, were done because of a virtual business shutdown due to the pandemic. This forced the company into survival mode.

When we last left Carnival in late July, the company had just announced the sale of another $1 billion of stock at $9.95/share, which was about 11% below the prior day’s closing price. Since then, shares have bounced around in a fairly narrow range, hitting $11 about a month later, and for the most part, staying in the $10 area until late September.

Then, last Friday, Carnival announced worse-than-expected third-quarter earnings, and the stock took another 23% haircut to close at $7.03. While revenue of $4.31 billion was up substantially year over year ($546 million same quarter last year), it still missed expectations by $600 million. Meanwhile, a loss of $0.58 per share was well off the $0.15 loss consensus expectation.

The company ended the quarter with nearly $7.1 billion in cash and short-term investments, but also with $34 billion in debt. Cash/short-term investments was down $700 million year over year, while debt was up more than $2.8 billion. Shares outstanding increased by about 133 million over the same timeframe.

Carnival’s current enterprise value (EV), which is calculating by adding total debt to market cap, and subtracting cash is now about $34 billion. That is very close to its February 2020, pre-pandemic EV of $33.5 billion. The big difference, however, between then and now is the stock price; it stood at about $33.50 at that time, and closed Tuesday at $7.76.

If you are new to the concept of EV, you may wonder how that’s possible, but it’s primarily due to massive increases in net debt (debt minus cash). In February 2020, net debt was around $11 billion; as of Q3, it was about $27 billion. In addition, shares outstanding increased more than 80%.

In terms of earnings estimates, the consensus currently has Carnival earning $0.57 in 2023 and $1.33 in 2024, putting the forward price-earnings ratios at about 14, and 6, respectively.

The path back to generating revenue has not been easy, nor will the path to profitability. The increased debt load has fueled an increase in interest expense, to the tune of $1.5 billion on a trailing 12-month basis, and $1.6 billion in fiscal 2021 (year ended November). In 2019, interest expense was just $229 million.

Carnival is back in business, but the path for stockholders won’t be an easy one.