The Carnival (LSE: CCL) share price rose about 100% in the past year. The company is once again in the news after it released its first-quarter results.
The company prides itself as being the only company in the world to be included in both the S&P 500Â and FTSE 250 indexes. I am curious to understand why the stock is cruising higher.
The bull case for Carnival shares
Carnival released its first-quarter 2021 business update, in which it reported a loss of $2bn. The reason is the halting of operations due to Covid-19. However, the cumulative advanced bookings for full-year 2022 are ahead of 2019. This shows that the demand is very strong for the company. The Carnival share price rose after the announcement, made yesterday.
The cruise ships are expected to return to sailing this summer. One of the advantages of this company is that it has operations in different parts of the globe. This will make the reopening of its cruise lines easier. For example, AIDA cruises started offering short-duration trips around the Canary Islands in March. Also, P&O Cruises (UK), Cunard and Princess Cruises will each offer a series of UK cruises this summer.Â
The company has about $11.5bn of cash and short-term investments. The cash burn rate for the first quarter has been better than expected. In tough times like this, it is important to have a very good liquidity position. The company will also achieve cost efficiencies as it has sold some of the older fleets. Further, it will be also adding larger and more efficient ships. This should also help to balance the pent-up demand in the near future.
The bear case for Carnival’s share price
In spite of the strong bookings, the company’s operations might take a couple of years to reach the pre-Covid-19 level. This is because cruises will be allowed to start operations only at reduced capacity. Also, in many parts of the globe, the Covid-19 cases are increasing. The cruise operators in the US are pushing federal health authorities to allow operations. However, as of now, there are no clear dates as to when the US cruises will restart.
The company is expected to report a loss for the second quarter of 2021 and also the full year of 2021. The company’s debt has increased from $11.5bn at the end of 2019 to $31.3bn at the end of February 2021. This led to the debt to equity ratio increasing from 0.45 to 1.58 during the same period. This is practical since the operations are stopped. However, if there is a prolonged stoppage of operations, it will be a concern.
Final view
Carnival has a good brand image. The various brands like Carnival Cruise Line, AIDA, Princess, Cunard, P&O Cruises, Holland America Line, Costa and Seabourn are catering well to customers in different parts of the globe. The strong booking with minimal marketing shows the loyal customer base of the company. For these reasons, I would consider buying the stock for my portfolio.