It Still Is Way Too Early to Consider Setting Sail With Carnival Stock

Stocks to sell

Many stocks hammered by the novel coronavirus have bounced back, but not names like Carnival Cruise Lines (NYSE:CCL). Investors may be willing to take a gamble with airlines, but CCL stock just makes people nervous.

carnival cruise (CCL) ship on the water

Source: Ruth Peterkin /

No surprises here. While airlines are slowly climbing back from their lows, cruise ships remain mothballed. With no-sail orders extended to Oct 31, cash burn is set to continue for Carnival, as well as for its rivals Royal Caribbean (NYSE:RCL), and Norwegian Cruise Line Holdings (NYSE:NCLH).

So, what does this mean for the industry’s largest operator? At first glance, you may think being size equals strength. Yet, as I wrote back in June, this may not be the strongest cruise stock out there.

Why? For starters, Royal Caribbean may be smaller, but it could recover much faster. Also, despite its size, Carnival may be behind its rivals in terms of liquidity and balance sheet strength.

And, with the odds favoring a “return to normal” much further on the horizon for cruise lines compared to other hard-hit industries, why buy CCL stock, or any cruise name, now? As the situation continues to be tough, you may have the opportunity to enter a position at much lower prices.

With this in mind, let’s dive in and see why it’s best to stay on the sidelines for now.

Riding Out the Storm With CCL Stock

As InvestorPlace’s Mark Hake discussed Aug 4, no-sail orders may continue to be extended until there’s a coronavirus vaccine. In other words, it probably won’t be until early 2021 at the earliest that cruise lines can even think about “returning to normal.”

In the meantime, the heavy cash burn we’ve seen so far shall continue. And, how much is Carnival burning through each month? Previously, the company projected $650 million per month in cash burn through the second half of 2020.

And, with ships not setting sail until at least November, that projection’s probably not coming down. Sure, with over $10 billion in liquidity, the company can stay afloat for more than a year. But, tapping into this lifeline means Carnival’s going to get out of this in a much weaker position.

With a heavy debt load incurred during this rough environment, it’s a long road ahead for shares to retrace prior levels. And, with uncertainty over how quickly cruise demand will bounce back, shares may head lower before it’s all said and done.

This Ship Could Sink Further

It’s easy to compare cruise line stocks to airline stocks, but as our own Matt McCall wrote last month, there’s a key difference. As he put it, there are multiple demand channels for air travel.

Sure, like cruise lines, people hop on planes for personal vacations. However, there are situations where people have to fly. Whether its to attend a family member’s wedding or required travel for business, there’s more at play that can help get the airlines back on their feet.

Cruise lines? All they have is the vacationer market. And, given there are plenty of vacation substitutes to cruise travel, this industry could still struggle. Even after ships set sail again.

So, where does that leave Carnival? Post-pandemic, profitability may continue to be a challenge. Coupled with what will be a highly-levered balance sheet, and it’s hard to see shares making any sort of epic comeback.

In fact, shares could keep on sinking lower for now. While the worst-case scenario may already be priced into airline stocks, it’s debatable whether that’s the case with cruise stocks.

How low could CCL stock go? That’s hard to tell. The specter of a vaccine coming out by early next year may be giving shares some support. But, what happens if bringing a vaccine to market takes longer than expected? Shares could fall back to lows set during March’s pandemic-driven sell-off.

Granted, that may be a great entry point for a “bottom-fisher’s buy.” But, for now, the prospect of further decline means you ought to steer clear for now.

Wait and See If CCL Stock Falls Back to Single Digits

As the world contends with the coronavirus, there’s still an opportunity to take high-risk, high-return positions in hard-hit stocks. But, compared to other struggling industries like airlines, cruise operators like Carnival face greater hurdles.

Hemorrhaging cash while its ships sit mothballed, the situation could continue to deteriorate. That may mean a great entry point down the road (if shares fall back to single-digits).

But, for now, take a “wait-and-see” approach with CCL stock. There’s no compelling reason to climb aboard today.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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