Carnival (LSE: CCL) shares have experienced a significant decline recently. Year to date, the cruise ship operator’s share price is down about 55%.
Is this an opportunity to buy a well-known FTSE 250 business for my portfolio at a discount? Or is it a trap?
Is now the time to buy Carnival shares?
Looking at Carnival’s recent second-quarter results, there are certainly some reasons to be optimistic here.
For the three-month period ended 31 May, revenue increased by nearly 50% compared to the prior quarter, thanks to a jump in occupancy from 54% to 69%. Meanwhile, cash from operations turned positive during the quarter.
Encouragingly, the company said that earnings before interest, tax, depreciation, and amortisation (EBITDA) from Carnival Cruise Line, its largest brand, has been consistently positive since March.
It also noted that it was ramping up to full operations, with over 90% of the fleet now in service.
Overall, the results showed that the company is starting to recover from the pandemic – which hit cruise operators hard.
Why the Carnival share price could head lower
What concerns me from an investment perspective, though, is the amount of debt Carnival is carrying on its books right now.
The recent Q2 results show that at 31 May, the group had a whopping $35.1bn worth of debt on its balance sheet. By contrast, it only had around $7.5bn worth of cash and short-term investments on its books.
This huge pile of debt is a concern for several reasons. Firstly, the company is not generating enough money to repay it (around $4.1bn is due between now and the end of 2023). In the second quarter, the company issued $1bn worth of loans due in 2030 to help it refinance various 2023 debt maturities. Secondly, interest rates are rising. So, Carnival is going to be looking at higher interest payments.
What this all means is that the company is at risk of experiencing financial difficulties, which could send the share price lower. It’s worth noting that my data provider tells me that Carnival has a Z2-Score (a measure of bankruptcy risk) of -1.2, which indicates a “serious risk of financial distress” within the next two years.
Industry challenges
On top of this, Carnival is suffering from challenges that many other businesses in the travel industry are experiencing right now. Not only is it experiencing staffing issues, but it’s also experiencing inflation and higher fuel prices. These issues are likely to prevent Carnival from making a full recovery for a while, in my view. It noted in the Q2 results that it expects to generate a net loss for the year ending 30 November 2022.
As for the valuation, Carnival currently trades at around nine times next financial year’s forecast earnings. That is quite a low valuation relative to the broader market. However, I’m not sure it’s low enough given the risks here.
My move now
Putting this all together, I’m happy to leave Carnival shares on my watchlist for now.
All things considered, I think there are better stocks to buy for my portfolio today.