Is buying Carnival shares a good investment?

| March 28, 2022

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cruise ship on the ocean

Key Points

  • Eight out of Carnival’s nine brands have resumed guest cruise operation.
  • Carnival Corporation is one of the largest cruise operators in the world.
  • Management expects its fleet in full operation for summer 2022. 

Carnival (LSE:CCL) shares have gone through a great upheaval since the start of the Covid-19 pandemic. The stock is yet to recover, and in the last year, it’s down over another 20%. With the Carnival shares being worth less than half of its pre-pandemic price, does it give my portfolio a good bargain? Let’s explore

What does Carnival do, and how does it generate revenue? 

Carnival Corporation and Carnival Plc exist as a dual-listed company (DLC). The businesses of the two entities are combined through a number of contracts, their Articles of Incorporation, and By-Laws, respectively. Carnival Corporation & Plc operates as if they are a single economic enterprise with a single executive management team and identical Boards of Directors. But each firm maintains its single identity. Both companies are listed separately on the New York Stock Exchange and London Stock Exchange with their own separate shareholders. What does the company do then?

Carnival is one of the world’s largest leisure travel companies with operations in North America, Australia, Europe and Asia. It operates through the following segments; North America and Australia (NAA), Europe and Asia (EA), Cruise Support and Tour and Other Segments. The cruise brands are; the Carnival Cruise Line, Princess Cruises, Holland America Line, P & O Cruises, Seabourn, Costa, AIDA, P&O Cruises (UK) and Cunard. Some of these brands have sailed the world spanning over a century. 

Why Carnival shares fell

At the start of the Covid-19, most businesses were forced to close down to curtail the spread of the virus. This was where Carnival found itself, as its businesses were closed down in 2020. With no running operations, the revenue stream almost entirely evaporated, resulting in enormous cash burn to cover the maintenance expenses for its fleet and employee salaries.

Consequently, Carnival shares experienced a massive selloff. Before the Covid-19, the company’s stock traded above 3600p per share. By early April 2020, the company’s share went as low as 581p – an 80% crash within a few months.

Today, the stock has recovered slightly, trading at around 1,260p. So, is now the time to add this firm to my portfolio?

A bull case for the Carnival shares?

In its 2021 Strategic and Financial Report, management reported the milestones it achieved in 2021. This includes ending the year with:

  • 50 ships in guest cruise operations compared to one ship in 2020.
  • Returning over 65,000 crew members to their ships.
  • Carrying over 1.2 million guests.

As of 13 January 2022, eight of the company’s nine cruise brands, which is 67% of capacity, had resumed guest cruise operations. The company expects to have its full fleet back in operation for the summer season, where it historically generates its largest operating income.

It won’t be surprising to see Carnival shares continue to steadily recover as operations resume. Having said that, there are some serious risks which I’m cautious of.

Carnival has missed both earnings and revenue estimates for the past six quarters. Aside from that, the company has burned cash on the maintenance of its cruise ships without generating revenue for a prolonged period of time. Subsequently, the debt pile has increased drastically. And with foreign exchange rates becoming increasingly volatile due to the geopolitical situation in Eastern Europe, Carnival’s international profits could become compromised.

Should I buy carnival shares?

At the current price, Carnival shares give my portfolio a great bargain. At least, that’s what I think. The company expects to return to full operation soon, and it’s adding a few more cruise ships to its fleet. Needless to say, this will add to its carrying capacity, which will lead to more revenue for the company.

The debt situation is concerning and could take several years to resolve. However, assuming operations resume as planned, the company seems to be on track to resolve this weakness over the long term. Therefore, I am considering this business for my portfolio today.

Learn more about Carnival shares

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.