Carnival Cruise Lines with Nobias Machine Learning: Does The Recent Rally Mean Clear Sailing Ahead?
It’s possible to make a very strong argument that the cruise line industry has been hurt more than any other by the COVID-19 pandemic. Social distancing measures and travel regulations have essentially shut down this global industry for over a year now. And yet, it is very expensive to maintain the large fleets that these companies own, regardless of whether or not they’re sailing with customers, meaning that we’ve witnessed large negative cash flows coming from this industry since the pandemic began. This has forced the cruise lines to raise enormous amounts of debt and to dilute their shareholder bases with equity offerings. There is still a lot of uncertainty surrounding when, or even if, this industry will return to normal and if there’s one thing the stock market hates, it’s uncertainty.
Looking back to the end of January 2020, Carnival Cruise Lines (CCL) shares are down nearly 44% from their pre-pandemic levels. Royal Caribbean (RCL) shares are down roughly 26.5% from their January 31st, 2020 share price. And, Norwegian Cruise Lines (NCLH) are down slightly more than 48.2%. And yet, throughout 2021, the cruise lines have fared better, due to hopes of strong demand for travel when once the world’s economy reopens in a post-COVID era. RCL shares up are 15.2% thus far throughout 2021, beating the S&P 500 by a slim margin. NCLH shares are up 14.04% year-to-date, posting slight underperformance. And CCL, the world’s largest cruise line, has the best year-to-date performance of the bunch, is up 20.31%. With this in mind, we wanted to take a look at what the blue chip Nobias analysts (4 and 5-star rated individuals) had to say about CCL shares after their recent rally.
Even after their 20%+ year-to-date performance, CCL is still well off of its pre-pandemic highs, which may point to significant upside potential left in the tank. Does this company have clear sailing ahead? Let’s see what the algorithm says! Melanie Schaffer, a Nobias 4-star rated analyst, recently published a bullish article on CCL shares on iqstockmarket.com. She wrote, “On April 7, Carnival reported a first-quarter 2021 loss of $2 billion compared to revenue of $150 million for the same quarter the year prior.”
This is obviously bad news for the company; however, she also highlighted management’s fleet expansion plans, saying, “The cruise line announced it would add two additional ships to its fleet by 2023, signaling an expected surge in customers.” It’s the idea that there is strong pent up demand for travel that is driving the bullish sentiment surrounding CCL shares in recent months.
Eric Volkman, a Nobias 4-star rated analyst who writes for The Motley Fool, recently covered the reopening of the cruise industry in an article, saying, “In yet another sign that the travel industry is poised for a monster comeback this summer, Carnival formally announced the restart of U.S. sailings.” Volkman continued, “The company, whose operations virtually ground to a standstill during the coronavirus pandemic, said the Galveston sailings will resume on Saturday, July 3 with the Carnival Vista. This will [be] followed shortly thereafter by the Carnival Breeze, which will start ferrying customers on July 15.”
Carnival is still having issues with jurisdictions that require proof of vaccination to sail. The Vista and Breeze ships will require full vaccination, yet the company is hoping that states where cruising is an important industry will lessen those requirements. Volkman highlighted this, saying, “In the company's press release on the resumptions, it quoted Carnival Cruise Line president Christine Duffy as explaining that "the current [U.S. Centers for Disease Control and Prevention, or CDC] requirements for cruising with a guest base that is unvaccinated will make it very difficult to deliver the experience our guests expect, especially given the large number of families with younger children who sail with us."’
Kate Stalter, a Nobias 4-star rated analyst, recently published a Carnival article on Yahoo Finance, which highlighted the “optimistic forecasts” that CCL management recently provided investors. Stalter said that according to the company’s recent press release, Carnival had $9.3 billion of cash and short-term investments at the end of Q2, “which the company believes is sufficient liquidity to resume full cruise operations.” She noted that the company said, “The monthly average cash burn rate for the first half of 2021 was $500 million, which was better than forecast, mainly due to the timing of proceeds from ship sales and working capital changes.”
Stalter continued, highlighting the fact that “42 ships from eight of the company's nine brands either have resumed operations or are scheduled to resume operations by the end of November. That tally represents more than 50% of the company's capacity, with more announcements expected in the coming weeks.” Lastly, she noted that “Cumulative advanced bookings for the full year of 2022 are ahead of a very strong 2019, despite minimal advertising or marketing.”
Moving on to the company’s balance sheet, Stalter did note that while management has worked hard to restructure the debt that it raised during the pandemic (CCL had $25.97 billion of long-term debt on its balance sheet at the end of its most recent quarter), the headwinds that this debt load creates are likely going to be around for years to come. She said, “CEO Arnold Donald also restructured the existing debt. He negotiated with creditors to move debt maturities out further, waive some debt covenants and even exchange some debt for equity. Meanwhile, he was able to raise $10 billion in new equity and debt to keep the company afloat.”
However, believes that Carnival is “not currently in a buy range” due to technical pressures and said, “This is a stock that appears to need a long cruising time to reach fundamental health, and it’s possible the increased debt load will be a problem for the foreseeable future.” Spreading of technical pressures, Mark Putrino, a Nobias 4-star rated analyst, recently published an article on Benzinga titled “Shorts Get Crushed After Carnival’s Stock Breaks Out” which highlighted his bullish outlook on the stock from a trader’s perspective.
In his article, Putrino argues that after the stock’s recent rally, the negative pressure that short sellers have been putting on CCL shares is likely to abate, clearing the way for more upside in the future. He said, “For three months, sellers kept a top on shares of Carnival Corporation (NYSE:CCL). Each time shares reached the $30 level, sellers overpowered the buyers and drove the price lower.” “But now,” he says, “things are different.” His thesis is that CCL’s recent rally above $30 means that “the sellers who created the resistance have left the market. With this supply out of the way, the stage is set for a new uptrend to form.”
Unfortunately for Bulls, this thesis has not yet played out. CCL shares rallied up to recent highs above $31 in early June; however, since then, we’ve seen another share price slump back down to today’s share price of $26.06/share. As of 6/15/2021, CCL’s short interest was 58.83 million shares. This represents roughly 7% of the company’s total float. This is still a significant percentage, which implies that there is still a strong negative sentiment that surrounds the stock. However, it also implies that a short-squeeze remains a possibility, which is something that traders like Putrino will be on the look out for.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Putrino isn’t the only analyst who’s recently come out with a bullish report calling for significant upside. Volkman published another CCL article at thefool.com, highlighting an upgrade from Steven Wieczynski, a noted analyst at Stifel, in which he raised his price target on CCL shares from $37 to $39. Volkman noted, “The new target is nearly 40% above the shares' most recent closing price.” However, he also acknowledges that Wieczynski’s move “is somewhat contrarian, as it comes a day after Carnival published a business update saying that it could book a massive non-GAAP loss of just over $2 billion for its Q2.
Volkman quotes Wieczynski as saying that the "Recent sell-off in CCL shares presents an attractive buying opportunity especially as the risk of additional dilutive equity/debt raises is not likely from here." The Stifel analyst continued, saying, “From here we actually see CCL being able to refinance large chunks of their debt structure which should lead to material interest savings down the road.” Overall, the majority of the credible authors that we track with the Nobias algorithm maintain a bullish stance when it comes to CCL shares with a 78% bullish rating.
However, in recent months, as the share price has rallied, we’re seeing a more balanced blend of bulls and bears come out as higher share prices diminish the stock’s margin of safety. During Q2, we’ve seen 11 reports published by 4 and 5-star rated analysts. 6 of those reports included “Buy” ratings while 5 of them fell into the “Sell” category. The average price target that we see amongst credible analysts on CCL is $30.33/share. Today, CCL trades for $26.05, which implies upside potential of approximately 16.4%.
Disclosure: Nicholas Ward has no position in any stock mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.