When Carnival Society (NYSE:CCL) posted another disastrous quarter of losses, sane investors would run for the hills. Instead of falling, CCL shares held firm after releasing third quarter results.
Why do investors continue to buy Carnival shares? Why should they think the stock is about to skyrocket?
The loss did not hurt CCL’s actions
In the third quarter, Carnival posted losses of $ 2.8 billion. Still, it ended the quarter with healthy cash flow of $ 7.8 billion. That’s enough to get Carnival back to full cruise operations. The absence of bankruptcy risks is a good reason to bet on the CCL title which climbs steadily from here.
During the quarter, the average cash consumption rate for the third quarter was $ 510 million. This number included the vessel’s operating expenses, restart costs, interest charges and capital costs. It excluded scheduled debt maturities and the provision of cash collateral.
Carnival completed cumulative debt principal payment extensions of approximately $ 4 billion during the quarter. Since it won’t have to worry about cash flow as its business gradually picks up, investors shouldn’t worry either.
President and CEO Arnold Donald highlighted the promoters’ strong net scores, the enthusiasm of his guests and crew, and the success of his restart efforts. For example, Carnival has restarted more shifts outside the United States than any other cruise brand. Demand is so high that customers are committing to early bookings at attractive prices for 2023. Building on this success, Carnival has started announcing the launch of the 2024 sailings even earlier than usual.
The company saw a $ 630 million increase in customer deposits. Reservations beyond one year are three times higher than historical levels. Carnival expects that debt deposits will continue to rise. Advertising spending is considerably lower. This allows the business to focus on lower cost channels. Plus, direct marketing to its database of 40 million guests doesn’t cost a lot. Word of mouth will reduce ad spend and increase margins.
The delta variant of Covid-19 is a risk. Health regulators could demand greater restrictions on the cruise industry, which will hurt revenues.
The increase in investment spending is a risk that weighs on the balance sheet. CFO David Bernstein said 19 ships have left the fleet. This will save on fuel costs by removing inefficient vessels. Conversely, the 10% increase in capacity will be added to the investment needs over the coming quarters. Thus, investors should be prepared for continued profit losses in the coming quarters.
Carnival will offset the rising costs of shipbuilding by restarting more ships. As people increase bookings, management will have a better forecast on demand.
Readers can use a five-year discounted cash flow income output model, which uses an income output multiple to calculate the final value after five years.
|Discount rate||8% – 6%||7%|
|Multiple of terminal revenue||2x – 3.8x||3.5x|
|Just value||$ 17.27 – $ 28.49||$ 25.65|
Model courtesy of finbox
In the above model, a generous income multiple of 3.5 times implies a fair value of almost $ 26 for Carnival stock.
Readers can argue that the stock doesn’t deserve high multiples just yet. The graph above would support this view. CCL stocks perform poorly on all key indicators of growth, value and quality. Until health regulators like the Centers for Disease Control and Prevention (CDC) allow the company to increase boat travel, Carnival will show quarterly losses.
2022 is an inflection point
Carnival has strong momentum for all brands in the second half of 2022. By then, its fleet utilization will increase significantly. In the spring of 2022, Carnival plans to return to its full fleet for guest operations.
For the moment, the occupancy rate of all its brands is good. By design, Carnival is currently not yet 100%. This is due to protocols aimed at maximizing the health, safety and well-being of staff and passengers.
Your takeaway meals
Carnival does its best to adjust prices based on booking models. Customer concerns for the Delta variant may affect reservations. So far, the company is meeting its occupancy rate targets through the first half of 2022. As infection rates drop around the world, Carnival will post better earnings. It will be close to breaking even as occupancy targets reach 100% early next year.
Carnival is already reporting increasing deposit rates. Customers can’t wait to take a vacation cruise next year and beyond. Investors who buy the shares now are betting that cruise ship activity will fully recover next year. CCL stock is a low risk bet as the restrictions relax.
As of the publication date, Chris Lau does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.