Carnival Corporation Stock Is Still Too Richly Valued

Carnival Corporation (CCL) is a leisure travel and cruise company. Its ships visit approximately 700 ports under various brand names, including the popular Carnival Cruise Line and Princess Cruises.

I am bearish on CCL stock. (See Analysts’ Top Stocks on TipRanks)

Omicron Rising

The entire cruise industry was forced to halt cruising during the spring of 2020. This was catastrophic to Carnival’s shareholders as revenues plummeted, new shares were issued, and debt was accumulated. Only now has the company begun to dig out of this deep pit.

The Omicron variant again threatens the operations of Carnival and the industry as a whole. Some reports say that this variant leads to a milder case of sickness, especially for the vaccinated. However, the variant spreads much faster and easier than previous versions of COVID-19. This is not good news for cruise ships where passengers are densely packed into tight spaces.

Already, news of sick passengers aboard a Royal Caribbean ship has emerged. 55 people aboard a ship that docked in Miami tested positive for COVID-19. This is a small percentage of the total passengers aboard the ship. Still, optics are everything. When news like this hits the wire, it can easily deter future passengers from booking trips.

The Dip Is Not Enough

Carnival stock has dropped nearly 25% over the past six months, although it is up 5% in the past 30 days. It currently trades about 33% off its 52-week high. This does not mean that the stock is deeply discounted, however. Due to the pandemic, Carnival has increased both debt and the number of outstanding shares.

Carnival had 689 million weight-average diluted shares outstanding when it reported results for November 30, 2019. As of the last report, the company now has more than 1.1 billion shares outstanding. This amounts to an increase of nearly 65% in just two years. Shareholders were badly diluted, and this can continue if further issues arise.

Debt is also a major problem for the company. Carnival was operating with $9.7 billion in long-term debt before the pandemic. The long-term debt now stands at over $26.8 billion. In Fiscal 2021, Carnival posted just $1.9 billion in top-line revenue and -$809 million in gross profit. This is clearly unsustainable and not attractive to investors.

The company is also not trading at a significant discount despite the steep decline in share price. The debt and dilution have raised the enterprise value. In fact, the company is trading about 4% higher than on December 31, 2019, based on this metric.

At the end of 2019, Carnival was trading with an enterprise value of $45.75 billion. It now trades with an enterprise value of over $47 billion. So, investors focused on share price alone are missing the boat. Carnival does not trade at a discount.

Wall Street’s Take

Over on Wall Street, analysts are neutral on CCL stock, with three Buys, five Holds, and one Sell rating assigned. The average Carnival Corporation price target of $28.67 implies more than 35.1% upside potential.

Too Risky

Carnival has been hit particularly hard by the pandemic, and shareholders have suffered. Now, the Omicron variant threatens to affect operations further. One also must wonder about the next variant and the one after that.

The company has issued millions of shares and billions in debt to stay afloat. Even after all of that, the enterprise value is somehow higher than it was at the end of 2019. Carnival is too risky for prudent investors at this time.

Disclosure: At the time of publication, Bradley Guichard did not have a position in the securities mentioned in this article.