Until the stock market crash in February, Carnival (LSE: CCL) shares hadn’t traded below 3,000p since early 2015. Since the crash, however, Carnival’s share price dropped to a low of 581p, before recovering to hover around 1,000p.
You don’t need me to explain why the world’s largest cruise ship operator has suffered such a massive crash. But if you’re a shareholder – like me – you may be wondering whether there’s any hope of getting your money back. That’s what I want to discuss today.
Q3 results show customer demand
One thing that’s never really been in doubt is that customers still want to go cruising.
In its third-quarter results on Tuesday, Carnival said that bookings for the second half of 2021 were at “the higher end of the historical range”. This is being achieved with “minimal advertising or marketing”.
These bookings are not just a replacement for this year’s cancellations, either. Carnival says that 55% of bookings taken during the three months to 31 August were new bookings, not rebookings.
The firm completed its first post-Covid-19 cruise last week – a seven-day tour of Italian ports. More are planned this autumn, but the vast majority of cruises have been cancelled until next year.
I think this is the real danger for shareholders. We don’t yet know if Carnival will be able to get back to normal without running out of cash.
Losing $650m per month
In normal times, Carnival says two-thirds of passengers each year are repeat customers. If this is still true after Covid-19, then I’d hope that the group will be able to achieve high levels of bookings on its slimmed-down fleet.
Indeed, Carnival’s cruise ships are still a valuable asset. The firm’s net asset value was about £16bn at the end of May. That’s double the stock’s £8bn market cap, suggesting that the shares could offer some asset-backed value.
The problem is that right now, Carnival is burning through about $650m of cash every month. This was reflected in an adjusted net loss of $1.7bn for the three months to 31 August.
If this situation continues for too long, the company could run into problems servicing its debt. If that happens, Carnival’s share price could fall much further.
Fortunately, the situation is still manageable at the moment. Carnival has raised $12bn of new funding already this year, and had $8.2bn of available cash at the end of August.
The firm now plans to raise a further $1bn through a stock offering to help reduce its dependency on further borrowing. I think this makes sense. Borrowing more – even if it’s possible – is expensive and makes little sense, given the company’s lack of income.
Will Carnival’s share price get back to 3,000p?
The problem now is that we don’t know when Carnival will be able to start operating its full fleet as normal. In a best-case scenario where trading returns to normal by the second half of next year, I think the share price could return to 3,000p.
On the other hand, if Carnival ends up needing a major refinancing to manage its debt, we’ll probably see the share price reset at a lower level.
My personal view is that Carnival shares are probably worth around 2,000p, on a medium-term view. I think the odds favour a recovery, so I’m continuing to hold my shares.