Recovering travel

On The Beach (LSE:OTB) was battered during the pandemic as demand for holidays understandably dried up. In the past month, however, the shares are up 25%. At the time of writing, they’re trading at 118p.

For the years ended September, in 2020 and 2021, the company reported pre-tax losses of £46.3m and £36.7m. While this shows some improvement, it has still been a very difficult period for the business.

However, for the six months to 31 March, group revenue grew to £52.9m, up from £12m for the same period in 2021. 

Over that time, pre-tax losses also narrowed from £21.6m to £7m. It’s clearly benefiting from more holiday bookings and the relaxation of international pandemic restrictions.

With cash of £14.6m and debt of £3.65m, the firm should be able to navigate its way through any future pandemic variants, should they arise.  

Strong profit outlook

Next, The Berkeley Group’s (LSE:BKG) shares are down 14% in the last three months and currently trade at 3,441p.

For the 12 months to 30 April, pre-tax profit climbed to over £550m, with revenue up 6.6% and earnings per share (EPS) surging over 23%.

It’s worth noting, however, that this growth isn’t guaranteed in the future.

The upmarket housebuilding firm has forecast that profits will continue to increase over the next three years. The value of Berkeley’s land portfolio has also grown over the past year.

Despite this, the company’s cash balance fell by £859m to £269m. There are also worries that rising interest rates will ultimately deter potential homeowners from purchasing, because mortgages will probably become more expensive. This could lead to a slowdown in the housing market more generally.

Hitting calmer waters?

Finally, Carnival (LSE:CCL) shares are down almost 50% in the last six months, and trade at 708p.

The cruise firm had a tough time during the pandemic. For the years ended November, in 2020 and 2021, pre-tax losses came in at $10.2bn and $9.5bn. 

Net debt also spiralled during that time, and currently sits at over $36bn. The business has confirmed it will seek to raise $1bn through the issuance of additional equity. This may be used to pay down some of Carnival’s near-term debt.

On the other hand, occupancy levels hit 69% during the three months to 31 May. In the previous quarter, they were 54%. Additionally, customer deposits rose from $3.7bn to $5.1bn over the same period and booking volumes nearly doubled. 

While the underlying financials are still not as solid as I would like to see, demand appears to be recovering.

Overall, these three firms all face challenges, but there are enough exciting prospects in each to favour investing in them. As such, I’ll be adding all three businesses to my portfolio soon.

Clearer skies?

The Wizz Air (LSE:WIZZ) share price is down 56% in the past year. But in the last month, it’s up 20% and the shares are currently trading at 2,226p.

The short-haul airline was battered during the pandemic. This was mainly because travel restrictions led to flights being grounded. 

As a result, the business posted consecutive pre-tax losses, for the year ended March, in both 2021 and 2022. These amounted to €566m and €641m, respectively.

However, revenue is starting to show signs of improvement. It rose from €739m to €1.6bn over the same period, suggesting that more passengers are flying as restrictions have been relaxed.

On the other hand, losses widened for the three months to 30 June. This was primarily down to higher jet fuel costs and more flight cancellations due to low staff numbers. But revenue was up 300% year-on-year.

Furthermore, passenger numbers climbed to 12.1m from 2.9m over the same time period. This comes as travel conditions continue to improve as the world emerges from the pandemic.

Calmer waters?

Carnival (LSE:CCL) has seen its share price fall by 56% in the past year and 7% in the last week. At the time of writing, the shares are trading at 630p.

The cruise operator was also greatly impacted by the pandemic. For the year ended November 2020, for instance, it slumped to a $10.2bn pre-tax loss. The following year was not much of an improvement, resulting in a $9.5bn pre-tax loss.

However, for the three months to 31 May, occupancy aboard ships was 69% of pre-pandemic levels, up from 54% in the previous quarter. In addition, booking volumes doubled in that quarter and customer deposits grew from $3.7bn to $5.1bn.

Furthermore, the company stated that it had cash and borrowings at $7.5bn towards the end of May. This could potentially help the firm to navigate its recovery to pre-pandemic levels. On the other hand, its debt pile stands at $36.4bn. This has grown significantly over the past two years, and this is something I would like to see the business pay down in the coming months and years.

Overall, these two travel companies have endured a torrid time over the past couple of years. Having taken a look at the businesses, however, I think they could now be on the road to recovery. As passenger numbers climb and revenue increases, I think they may potentially turn losses into profits in the near future. To that end, I’ll add both firms to my portfolio soon. 

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.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

BAE Systems 

What it does: BAE Systems is one of the world’s leading defence companies and a major supplier to UK and US armed forces.  

By Royston Wild. Defence giant BAE Systems (LSE: BA) is the best-performing FTSE 100 share over the past six months at the time of writing. 

In fact, it’s risen around 40% in value in the year to date. And more recently its share price has remained rock-solid whilst other UK shares have toiled in this new bear market. 

I think the Footsie firm remains an ideal growth stock for me to buy today. Soaring inflation and growing recessionary risks pose a threat to more cyclical stocks. Defence stocks like BAE Systems, on the other hand, can expect trading conditions to remain robust in the near term, meaning investor selling should be kept to a minimum. 

Government defence spending is something that remains broadly resistant to wider economic conditions. War is a constant of history and countries have to be prepared to defend themselves at a moment’s notice. 

This explains why City analysts think BAE Systems’ annual earnings will rise 7% in both 2022 and 2023. This is despite the threat that supply chain problems pose to its operations. 

Royston Wild does not own shares in BAE Systems. 

Experian

What it does: Experian provides credit data to lenders to allow them to assess the creditworthiness of potential borrowers.

By Stephen Wright. I’m keeping things simple with my top UK growth share for July. 

In my view, a good growth stock is one that grows. Specifically, it grows its earnings and then uses those earnings to generate more earnings. This is exactly what Experian (LSE:EXPN) does. 

The company’s strong growth is protected by a high barrier to entry. Experian has a huge database of credit information that it bases its credit scores on, and this would be difficult for a smaller competitor to emulate.

Furthermore, most mortgages require a tri-merge report. Experian’s credit report is part of this, which makes me think that the business will continue to do well going forward.

I’m impressed by the company’s growth and I think that shares trade at a reasonable price at the moment. As such, I’m looking at adding to my investment in Experian stock in July.

Stephen Wright owns shares in Experian.

Coats

What it does: Coats is the world’s leading industrial thread manufacturer. It operates in sectors including fashion, energy and telecoms.

By Roland Head. Thread maker Coats (LSE: COA) is a business that many investors have never heard of, even though we probably all use its products.

This British business has been trading for more than 250 years and operates in 50 countries, with annual sales over $1.5bn.

Analysts expect Coats’ earnings to rise by 13% this year and by 17% in 2022. Despite this positive outlook, the shares currently trade on just 10 times forecast earnings. I reckon that’s too cheap for a business which generated a 21% return on equity last year.

I admit that Coats has disappointed the market before. Demand for some of the company’s products could also fall in a recession.

However, I think the diversity of Coats’ customers should provide protection against localised problems. I’m also impressed by the changes being put in place by CEO Rajiv Sharma. I expect strong growth over the next few years.

Roland Head owns shares in Coats.

JD Sports Fashion

What it does: JD Sports Fashion is a retailer of athletic footwear and athleisure clothing that operates globally.

By Edward Sheldon, CFA. Shares in JD Sports Fashion (LSE: JD) have taken a huge hit in 2022, and I think this has presented me with a great opportunity to buy the growth stock in July.

JD’s full-year FY2022 results, posted in June, were very encouraging to my mind. For the 52 weeks ended 29 January 2022, revenue came in at £8.56bn, up 39% year on year. Meanwhile, adjusted earnings per share (EPS) jumped to 12.8p versus 6.4p a year earlier.

Looking ahead, I’m not expecting growth to continue at this pace. However, in the long run, I expect demand for casual attire to boost revenues and profits significantly.

One risk to consider here is a pullback in consumer spending due to the cost-of-living crisis. This could hit sales. However, with the stock now trading on a forward-looking P/E ratio of under 10, I think a lot of this risk is priced into the stock already.

Edward Sheldon has no position in JD Sports.

Future

What it does: Future is a massive media conglomerate serving digital media on a variety of topics to a global audience of over 300 million people.

By  Zaven Boyrazian. Investing in a media publishing house may sound old fashioned. But it’s proven to be a lucrative move for shareholders of Future (LSE:FUTR). The company is one of the largest media groups in the world, with over 250 websites under its umbrella, including TechRadar, Country Life, and its recently acquired Who What Wear. And over the last five years, the stock is up 700%!

Revenue is primarily generated through advertising and subscriptions. But with more service platforms like GoCompare emerging in its brand portfolio, the company has begun earning considerable income through affiliate fees.

Despite delivering high-double digit growth so far this year, shares have since taken quite a tumble thanks to investor sentiment waning. There are undoubtedly risks surrounding management’s primarily acquisition-driven approach. However, with an excellent track record, I can’t help but see this slump as a buying opportunity for my investment portfolio.

Zaven Boyrazian does not own shares in Future.

Molten Ventures

What it does: Molten Ventures is a UK-based tech-focused venture capital firm with a track record of backing now-listed businesses from very early stages.

By Andrew Woods. Molten Ventures (LSE:GROW) performed well during the pandemic. For the year ended March, between 2021 and 2022, pre-tax profit grew from £267m to £325m. The value of the firm’s gross portfolio also rose from £984m to £1.53bn over the same period.

The company’s most exciting performance, however, is in its earnings-per-share (EPS) growth. Between 2018 and 2022, EPS rose from 89p per share to 200p. By my calculation, this means the firm had a compound annual EPS growth rate of 17.6%. While past performance is not necessarily indicative of future performance, this growth rate is extremely attractive.

The company’s most recent net asset value (NAV) was 937p per share in March. While this is now a few months old, it’s clear that the current share price of 460p is a significant discount. Despite this, the broader economic environment has hit tech stocks particularly hard. There may be a further slide as inflation increases and interest rates continue to rise.

Andrew Woods does not own shares in Molten Ventures.

Renalytix

What it does: Renalytix develops and sells medical devices that can diagnose risk indicators for kidney disease.

By Christopher Ruane. I own shares in Renalytix (LSE:RENX) and so far it has been an absolute dog! The shares have lost 85% of their value in the past year alone. Definitely there are still risks here, such as the substantial costs required to sell the company’s system into more healthcare providers.

But I also see a potentially fantastic opportunity if things go well. There is clinical evidence that the technology can help improve diagnostic outcomes. A presentation this month revealed its positive impact at a leading New York healthcare provider.

Kidney disease is the direct cause of over a million deaths globally each year. If Renalytix can sell its innovative, proven system into more healthcare groups, the scalability of its business model could generate higher revenues without adding costs at the same speed. In the long term I remain optimistic about the outlook, but recognise the risks involved.

Christopher Ruane owns shares in Renalytix.

Spirax-Sarco Engineering

What it does: Sprirax-Sarco Engineering is a UK-based industrial engineering company focused on thermal energy management

By Paul Summers: Cheltenham-based Sprirax-Sarco Engineering (LSE: SPX) is a high-quality company I’ve been monitoring for a while now. A world leader at what it does, the FTSE 100 member has long generated high margins and returns on the capital it invests. It’s these hallmarks that have been found to reward growth investors like me handsomely over time.

The only problem with all this is that the stock has always looked extremely expensive. Until now, that is. A 40% slide in the share price in 2022 leaves Spirax trading at almost 28 times earnings. Granted, that’s still not cheap. However, the idea of beginning to build a position here for the long term now looks far more palatable. 

There’s always a chance things could get worse before they get better if we get a recession. However, high customer loyalty should mean the pain should be temporary.

Paul Summers does not own shares in Spirax-Sarco Engineering

Carnival

What it does: Carnival operates a list of renowned cruise line brands. It sells deals and cruise packages to popular destinations.

By John Choong. Carnival (LSE:CCL) was close to hitting a five-year low in June, but positive guidance provided in its most recent trading update sent its share price rocketing by more than 10%. While this is minuscule on the wider scale of things, there are reasons to be optimistic about a potential recovery.

Despite the firm missing analysts’ estimates on earnings per share, revenue and room occupancy rate, revenue grew by almost 50%. More importantly, I was impressed with the company’s future bookings. The figure came in nearly double of Q1 2022, marking its best figure since the beginning of the pandemic. This is something to cheer for, because future bookings bring in the much-needed cash Carnival requires to return to profitability.

Provided that travel tailwinds continue to persist, Carnival could pull off a monumental recovery, pay off its debt gradually, and even achieve positive free cash flow soon. As such, grabbing shares at the current price could be a steal for years to come.

John Choong has no position in Carnival

Clearer skies ahead?

TUI (LSE:TUI) was decimated by the pandemic. I’m hardly surprised that its share price has plummeted 55.5% in the past year. Currently trading at 164p, the firm has incurred heavy losses over the past two years.

The travel company sank to a €3.2bn pre-tax loss for the year ended September 2020. 

Fast-forward one year, to September 2021, and pre-tax losses had narrowed slightly to €2.4bn. While this gave me confidence that a potential recovery was in progress, this is still a significant loss.

This was caused, of course, by a lack of international travel. When the pandemic struck, almost every country closed its borders and introduced tight entry restrictions. This severely limited TUI’s ability to operate.

Recently, however, the business has stated that summer bookings for 2022 are running at about 85% of 2019 levels, while losses halved for the six months to 31 March. Over those same six months, revenue jumped to €2.1bn, from €248m for the same period in 2021.

There are still challenges ahead, like staff shortages, but if TUI can get back to full working order, I think the share price could move markedly higher in the coming months.

Are we through the choppy waters?

Like TUI, Carnival (LSE:CCL) has suffered over the past two years. The shares have fallen 61% in the past year to currently trade at 725p.

As a brief reminder, Carnival is an operator of cruises. While the company had around $6.4bn in cash at the end of February, it also had spiralling debt and costs. 

To cope with the rough seas of the pandemic, it took on significantly more debt. This now totals somewhere in the region of $20bn.

However, passenger ticket revenue for the three months to 28 February was $873m, up from just $3m during the same period in 2021. Furthermore, total revenue (including onboard sales) amounted to $1.6bn, up from $26m year on year.

Despite this, with more voyages come more costs. The business is also not immune from the challenges of inflation and surging energy prices. These could eat into future balance sheets, given the broader economic environment at the current time. 

While a recovery may be on the cards here, the debt issues and increased costs could make it slower than expected.

Overall, these two firms have endured a torrid time recently. While there are risks attached to buying shares in either firm, I will split my £2,000 equally and purchase shares in both in advance of a potential travel recovery.  

Murky waters

Pre-pandemic, the travel cruise industry was a rather lucrative one to invest in. The top cruise companies enjoyed profit margins of over 10%, and an ever growing market. Consequently, Carnival enjoyed consistent top and bottom line growth throughout the years.

Then came the pandemic, which nearly destroyed the entire cruise ship industry, as passenger numbers plummeted to levels not seen since 2000. Nonetheless, a sharp rebound in 2021 seemed to indicate that travel may be returning with a bang. Even so, a great deal of uncertainty still lies ahead for Carnival.

Is Carnival getting started?

At the end of last week, management announced its plans to release its Q2 earnings later this week. As such, future bookings will be one of the most important metrics I’ll be paying attention to. The majority of Carnival passengers travel to and from the United States. I’m expecting a decent figure, after the US lifted testing requirements last week.

If a stronger than expected bookings number is reported, I envision the Carnival share price to rebound. On the flip side, a much weaker than expected number could be the nail in the coffin for the FTSE 250 firm. Nevertheless, Carnival shares are up 8% on Monday as investors gear up for the much anticipated report.

That being said, although Covid variants have taken a backseat, another mutation could send the travel industry into another decline. Additionally, persistent economic headwinds are expected to hinder passenger growth in the coming quarters. High oil prices, roaring inflation, and ever increasing interest rates have consumer sentiment pointing towards a recession. These worries were echoed recently by a Morgan Stanley analyst who predicts lacklustre sales for the cruise ship company.

A sinking ship?

Despite the potential upbeat numbers, there’s one thing I can’t ignore about Carnival, and that’s its soaring levels of debt. The company only has $7bn in cash and equivalents, and almost $36bn of debt to repay. While its near-term repayments aren’t too hefty, the figure only gets exponentially higher from here on out.

With the increasing amount of repayments, the firm will have to hope that the industry rebounds sharply and quickly to generate enough cash. Otherwise, I foresee the board issuing stock to raise cash, thus sending the Carnival share price even lower. The alternative would be to refinance its debt, but doing so risks taking on higher interest rates, and a higher total repayment value.

If historic demands returns, Carnival shares may just make one of the biggest comebacks. However, that remains a slim possibility given the current economic landscape. Not to mention, a Bloomburg analyst even red flagged Carnival’s ability to meet repayments. Therefore, I’m doubtful that the Carnival share price can recover from these levels for the foreseeable future. So, I won’t be investing in Carnival shares. Instead, I’ll be investing in other growth stocks that have better financials.

However, now is a good time for me to think about buying stocks, I feel. I’ve found three potential companies to purchase shares in, so let’s take a closer look.

Hochschild

Hochschild (LSE:HOC) is a silver and gold mining firm operating in Peru, Argentina, and Chile. With increased market volatility, precious metals may become increasingly attractive as ‘safe-haven’ investments.

The business may benefit as its output becomes more valuable and, therefore, its share price may rise. 

During the early days of the war in Ukraine, for instance, shares in Hochschild rose about 50% as investors panicked. 

The investment bank Berenberg recently increased its target price from 130p to 160p on account of higher metal prices.

So with the shares currently trading at 111p, down 35% in the past year, I feel they could have higher to climb.

However, there is always the risk of further pandemic variants impacting day-to-day mining operations.

Carnival

Carnival (LSE:CCL) is a global operator of cruises. In the past month, the shares are down 31.5% and trade at 691p. The company has quite simply been battered during the pandemic, reporting pre-tax losses of throughout 2020 and 2021.

The firm also reported an adjusted net loss of $1.9bn for the first quarter of 2022 and this trend of losses is something I would like to see reversed soon.

For the first three months of 2022, however, revenue per passenger had grown around 7.5% compared to the same period in 2019. 

With a cash balance $7.2bn at the end of March 2022, this should be enough for the business to deal with any further difficulties future pandemic variants could bring. 

Ferrexpo

Finally, Ferrexpo (LSE:FXPO) is a producer of iron ore pellets. It operates in Ukraine and the shares are down 48% in the past six months, currently trading at 147.8p.

There were concerns over whether the company could still operate during the war. So far, it has maintained production. For the first three months of 2022, it produced 2.7m tonnes of pellets, roughly the same amount as the first quarter of 2021. 

Furthermore, rail and barge connections to Europe are still open, meaning that sales and shipments can continue uninterrupted. 

There’s always the risk of a prolonged conflict eventually taking its toll on the business though. With a cash balance of $159m at the end of March, however, I think the company has the resources to navigate any difficulties it encounters.

Overall, the share prices of each of these three firms have fallen sharply at times in the recent past. As part of a wider market correction, I think I’ll buy the shares at knockdown prices to hold for the long term.  

Recent results

As a major specialist in cruise holidays, Carnival operates throughout North America, Europe, Australia and Asia. 

During the pandemic, the business was battered as it was unable to run its cruises. The effects can still be seen in its financial results. 

Revenue for the year ended November 2020 was $5.6bn. For the same period in 2021, revenue had fallen further to just $1.9bn.

Between 2020 and 2021, however, losses before tax narrowed slightly from $10.2bn to $9.5bn. This may be the first early indicator that the cruise industry was slowly starting to recover. But it should be noted that any further variants of concern could grind operations to a halt.

These figures are all still well below historical levels. In 2017, for instance, revenue was $17.5bn, while the firm recorded profit before tax of $2.6bn.

This is a reminder that Carnival has a long voyage ahead to reach pre-pandemic levels. 

Calmer seas coming for this cheap FTSE 250 stock?

In results for the three months to 30 November 2021, however, the company reported liquidity of $9.4bn. In addition, it announced that it was operating at about 61% capacity. While this is still relatively low, the business had forecast a full fleet return by spring 2022.

Furthermore, for the three months to 28 February 2022, revenue stood at $1.6bn. This was a vast improvement year on year because revenue was just $26m for the same period in 2021. 

During this time, Carnival also stated it was operating at around 75% capacity.

That said, last December, investment bank Berenberg commented that the cruise sector recovery was taking longer than anticipated, but it maintained its 1,600p price target. With the shares currently trading at 1,366p, down 14% in the past year, I think there may still be significant upside potential as capacity increases.

What’s more, the company may be undervalued. By comparing the firm’s trailing price-to-earnings (P/E) ratio with a major competitor, Royal Caribbean, this may indicate that Carnival shares are cheap. 

Carnival has a trailing P/E ratio of 4.83, while Royal Caribbean has a ratio of 57.31. Based on this comparison, Carnival shares may indeed be a bargain at current levels.

Overall, this undervalued business looks to me to be recovering. While there is still a long way to go, recent data on capacity levels suggests that things are starting to return to normal. I will be buying shares soon.

With that in mind, here are two FTSE 250 stocks I would buy for my portfolio today and one company I do not own and would sell if I did. 

Luxury market 

My first ‘buy’ company is the luxury watch retailer, Watches of Switzerland (LSE: WOSG). Demand for luxury watches has surged over the past two years. This company is rising to the challenge of growing demand by expanding worldwide.

With its windfall profits, the group is plotting a global expansion. It is looking to grow its market share in Europe and the US over the next few years through a combination of organic growth and acquisitions.

While this strategy is exciting, I am wary that many retailers have struggled in the past due to overexpansion. This is the most considerable risk the group faces. 

Despite this headwind, with more growth on the horizon, I am happy to add this FTSE 250 stock to my portfolio right now.  

Defensive income 

With uncertainty building in the global economy, I have also been looking for defensive equities to add to my portfolio. So I have settled on the water company Pennon (LSE: PNN).

Water is a highly defensive market. Corporations can increase their bills to consumers at a rate equal to, or above, the inflation rate every year, and customers usually have to pay as water is an essential service. 

That said, the most significant risk to the company’s growth is regulation in the long run. The water regulator, Ofwat, dictates how much Pennon is allowed to charge consumers. It could clamp down on the business if it thinks it is charging too much. 

Still, these qualities suggest that the business can continue to grow in an inflationary environment, making it the perfect stock to own right now. 

The shares also offer an attractive dividend yield of 3.4%, at the time of writing. This is not the highest dividend yield on the market, but the qualities outlined above suggest the dividend is more attractive than most. These are the reasons I would buy the stock right now. 

FTSE 250 stock in trouble 

While I would buy the companies outlined above, I would also sell Carnival (LSE: CCL) if I owned it and would certainly not buy it today. The cruise line operator nearly collapsed during the pandemic, and while customers are returning, it could be years before the business returns to full health. 

The debt it had to take on to push through the pandemic has severely weakened its balance sheet. It is not clear when the business will be able to start reducing these liabilities. Consumers are in no rush to return, and in the meantime, the enterprise continues to lose money. 

Nevertheless, the company’s outlook is not entirely negative. Some consumers are returning, and they seem willing to spend more. If this trend continues, its outlook may improve. 

However, I am not buying this recovery story, considering the risks outlined above. I think the two FTSE 250 stocks outlined in the first half of this article have much brighter prospects. 

Is this UK share a ticking-time-bomb?

There seems to be a lot of hope being held out for Cineworld (LSE:CINE). The UK cinema chain saw its shares collapse in 2020 after the pandemic forced everyone to stay at home. But since then, the situation has improved. Cinemas have reopened. And with a lot of pent-up demand from consumers, along with a long line-up of delayed blockbusters, the resurrection of its revenue stream seems to be progressing well.

That certainly sounds like an exciting recovery story on the surface. But after exploring deeper, I remain sceptical about the long-term prospects of this business. Primarily because of its debt.

Cineworld’s pile of loan obligations has always been substantial, thanks to its acquisitive growth strategy over the years. Unfortunately, this may have sealed the group’s fate. Without any meaningful cash flow to cover interest expenses at the height of the pandemic, management was forced to take out new loans while renegotiating covenants on existing ones.

Consequently, it now has around $8.8bn (£6.4bn) of debt to repay. And with interest rates on the rise, along with a massive $970m (£705m) legal bill to cover after pulling out of the Cineplex acquisition in 2020, even if the company can return to pre-pandemic sales levels, it likely won’t be sufficient to cover its obligations to creditors.

With the covenants and waivers renegotiation lever already pulled, I think a financial restructuring could be on the cards. This means lenders would agree to write off a chunk of debt in exchange for new equity. But historically, when this happens, existing shareholders can be left with close to worthless shares. As such, the potential gains from a recovery doesn’t match the risk in my mind. That’s why I’m steering clear of this UK share.

The travel sector limps on

Carnival (LSE:CCL) is another company thrashed by Covid-19. This cruise line suspended most of its operations in the early days of the pandemic to protect its customers. The travel restrictions that followed for months after only increased the pressure, and management also relied on debt financing to stay afloat.

Skip forward to today, and the group has over $33.2bn (£24.2bn) of debt on its balance sheet. Just like Cineworld, rising interest rates could be disastrous for profit margins. That’s obviously bad news for the shares of this UK stock. But the situation may not be as bleak as it seems.

Unlike Cineworld, Carnival has amassed over $9.1bn (£6.6bn) in cash that can easily cover its short-term obligations. Meanwhile, assuming that new travel restrictions are not introduced in 2022, management expects its entire fleet of cruise ships to return to operations by June.

I must admit this is an encouraging sign. However, I think there are far better and less leveraged investment opportunities for my portfolio. Therefore, I won’t be buying these UK shares today either.