Carnival Corp (NYSE: CCL )is one of the world’s largest cruise operators having 22% customer market share of the cruise line industry. The company is one of many casualties of the coronavirus instigated global economic slowdown, that has particularly demolished the travel and entertainment industries. The company’s stock has nose dived from $51 in January to just $17, going down to as much as $9 before gaining back some ground.
The cruise industry is a extremely capital intensive and cost intensive business and the total shutdown of all cruises by the CDC(Center of Disease Control) till 1stJuly has left investors to panic over the company’s ability to stay afloat. Last month, the company was actively looking to raise money when a consortium of hedge funds offered the company up-to $6 billion dollars of normal and convertible debt at a 15% interest, which was deemed too high by management. (NYMag)
Luckily for the company, the US Federal Reserve jumped into to the market shortly after and started buying chunks of investment grade bonds issued by large corporations. The government intervened after a cash shortage in the credit markets led to a surge in short-term debt interest rates, putting a large number of corporations at risk. Although the company didn’t receive any direct aid from the Fed, the government’s move helped free up capital in the credit market and pushed short-term interest rates down, which helped Carnival to raise capital at more reasonable rates than offered before.(WSJ)
Under the current no sail order enforced by the CDC, the entire cruise industry has it’s focus on cost cutting and short term liquidity. With no revenue flowing in, Carnival CFO David Bernstein stated that he expects monthly cash burn of $1 billion for the company. The company has recently raised $6 billion of debt and $1.25 billion in stock(CNN). The new debt of which $4 billion is secured debt carrying an interest charge of 11.5% while the other $2 billion is convertible debt carrying an interest charge of 5.75%. After it’s latest fund-raise, the company received a BBB rating from S&P Global, much like it’s rival Royal Caribbean(Barrons).
Apart from capital raising efforts, the company is also undertaking various cost cutting measures. The company announced that it has suspended it’s dividend till further noticed and postponed all capital expenditure plans till the end of the next financial year. In the near-term, the company has dropped it’s average cruise price for 2020 by 7.7%, with lower tier accommodations being offered at a 11.7% discount and mid-range accommodations being offered at a 9.5% discount(ThinkNum).
Based on the company’s financials, it is clear that it has ample liquidity to weather the no-sail order, it is however uncertain when demand will recover and whether the no sail order will be extended.
Given the near 70% discount the stock is trading at right now, Carnival presents a high upside opportunity for investors, provided they understand risk and are comfortable with it.