The Carnival (LSE: CCL) share price has risen by 50% over the last two months. But the world’s largest cruise ship operator is still in hibernation mode. It’s also recently extended the closure period for most of its biggest brands.
As a shareholder myself, I’ve averaged down and intend to continue holding for the long term. But this isn’t the safest of stocks at the moment. The big risk is that Carnival will run out of cash before it can start making money again.
Is now the right time to be buying Carnival shares, or should we stay on the sidelines until the outlook starts to improve?
Getting moving won’t be easy
Carnival owns major cruise brands including P&O Cruises, Cunard, Costa, Princess and Holland America. The rapid rise in Carnival’s share price suggests to me that investors are buying the stock in the hope the cruise industry will quickly be able to get back to normal.
However, indications so far suggest to me this could be more difficult than many investors expect.
Carnival faces two big challenges, in my view. The first is that the company must be sure it can operate cruise ships without any risk of them becoming coronavirus infection clusters. Cruise operators won’t want a repeat of the the bad press they received in the early days of the Covid-19 pandemic.
The second challenge is that there are still a lot of restrictions on free movement around the world. Carnival has already delayed several cruise restarts as a result of ongoing travel restrictions.
The cost of doing nothing
Carnival’s share price of around 1,350p may look cheap compared to an estimated net asset value of 2,700p per share. However, this business is losing money fast. Management expect cash costs of about $1bn per month while the group’s fleet of 105 cruise ships is laid up.
This suggests to me the $6.5bn of extra cash raised by the firm in April could run out by October.
The latest news from the company suggests very few of its ships will be operating by then. For this reason, I think it’s likely Carnival will need to raise funds again later this year, or perhaps early in 2021.
If this happens, I can only see two options — a big rights issue, or a debt-for-equity swap. In either case, a large number of new shares would be issued. This would result in significant dilution, reducing the stock’s net asset value per share.
Carnival share price: high enough?
As I mentioned earlier, I’m holding onto my Carnival shares. I believe the cruise industry will recover and that this company will remain the market leader. But I won’t be buying anymore shares until I’m sure the company is on a sustainable financial footing.
We should learn more later this week when the company is due to publish its second-quarter figures. I’ll be watching closely.
But for now, I think the Carnival share price is probably high enough.