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Should You Buy Carnival Before Cruising Opens Again?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I to want help you figure this out by answering – Should You Buy Carnival Before Cruising Opens Again?

Carnival (CCL) is the worlds largest global cruise ship company with more than 88 ships available after cruising can resume in the coming months.

Before Covid, Carnival attracted 13 million guests in 2019.

Since Covid, the company’s operations have been shut down.

Cruise lines haven’t been allowed to operate in most of the world since April 2020 after almost 700 passengers on the Diamond Princess cruise line got infected with the virus.

Various cruise lines attempted to slowly allow ships to sail again during the last year only to be shut back down again due to rapid rises in infections.

Carnival plans to set sail again on July 1st, 2021.  But that will mark almost 15 months with zero revenue.

Companies cannot continue operating on zero revenue because their expenses generally remain the same. Here’s what this scenario looked like for Carnival in 2020.

  • Carnival lost $10.24 billion in 2020 – or about $28 million per day.
  • It fired 20% of its entire staff – more than 7,000 people… And cut pay of thousands of others.
  • And it was forced to take on $19 billion of debt just to stay afloat.

Because of this, CCL stock is down 44.3% from its then high share price in January 2020.

But this is all in the past…

Now that cruising appears to be opening again this Summer, should you buy Carnival before that happens? 

That’s what I want to help you figure out today.

It’s based in Miami Florida.  It has a $33.81 billion market cap. And before Covid, it earned large profits… Which is reason #1 to consider buying its stock.

Carnival Earned Large Profits – Before Covid

Between 2011 and 2019 Carnival earned an average operating income margin of 14.6% per year.

I look for anything above 10% on a consistent basis so this is great.

However, due to Covid and the closures I talked about above, this dropped to negative 121% last year.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Between 2011 and 2019 this averaged 7.9% per year.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

This metric cratered last year to negative 177.4%.

Before Covid, these were spectacular… After Covid, horrific.

Let’s keep going before I tell you what I expect in the future for Carnival.

What about its debt levels?

Carnival Had Low Debt Before Covid

As of this writing CCL has $9.51 billion in cash compared to $28.4 billion in debt.

As a percentage of its balance sheet total liabilities make up 61.7%. 

Debt makes up 84% of its market cap.

And its debt-to-equity ratio is 1.38.

These all well above the minimum thresholds I look for… As one example, I look for debt to equity ratios to be below 1.

The massive $19 billion in debt it added in the last year took Carnival from having low debt levels… To having enormous debt.

Yes, revenues and profits will pick up when it begins sailing again… And yes, this will increase the share price.

But will it earn enough profits to pay down this enormous debt faster, so its balance sheet becomes strong again?

That’s a major question I can’t answer right now.  I’ll detail fully why below.

But before we get to that is it even cheap enough to buy?

Carnival IS Cheap…

With the markets at or near all-time highs you’d expect what was a great stock before Covid to be selling at an enormous valuation.

But it’s not…

As of this writing its P/E is 5.99.

Its P/CF is 21.6.

Its forward P/E is unreadable due to forecasted unprofitability going forward.

And its enterprise value to operating income – EV/EBIT is a reasonable 11.9.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics combined show that Carnival is undervalued right now.

And this means owning its stock does give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Carnival being undervalued right now, its stock offers you a large margin of safety… Especially if it gets back to pre-Covid levels of success.

However, there is one concern you need to be comfortable with before buying its stock.

One Major Area Of Concern…

If you’re now thinking about buying Carnival stock for your retirement portfolio, I have one major point of caution.

Yes, as of this writing Covid cases and deaths are way down from their highs late last year.

This due to people better social distancing, the vaccines, and all the other great progress the world’s made in the last year to fight this virus.

However, after two months of a steep decline – Covid cases and deaths are now rising rapidly again in March and April 2021.

As of right now, Carnival plans to begin sailing July 1st… And as the worlds largest cruise line operator as it goes, so does the rest of the industry.

But the key word in that last sentence is plans.

The first closures of the cruise line industry happened in April 2020.

It was supposed to open back up in June 2020, then that got pushed to October 2020, then it got pushed to “early 2021, and now that’s mid-Summer 2021.

With Covid cases and deaths rising worldwide again, will that push the entire industry back further?

Italy and France are already back on lockdown right now due to the skyrocketing cases and the “mutant” strains there of the virus that are more contagious.

And India on April 5th reached its highest new reported case day ever at more than 103,000 new cases.

Yes, the pandemic massively slowed down in January and February 2021.

Was that a mirage?

Are the current vaccines enough to protect us from these more contagious strains?

Will we see worldwide mass lockdowns again?

At this point no one on Earth knows the answers to these questions.

But one thing that’s a certainty, is that the first industry to be shut down – or remain shut down – will be the cruise industry.

Almost every other industry has opened to some degree other than cruising.

And if Covid cases and deaths continue rising it will continue to be shut down due to the nature of the business…

Proximity to others for days or weeks at a time in confined areas.  That’s why 1 initial case of Covid on the Princess Diamond turned into 700 cases in days.

Countries will do anything to keep that kind of rapid spread from happening again… So, if cases and deaths continue to pick up, cruise lines will remain closed.

Carnival’s done an amazing job keeping the company alive since the initial shut down. 

And it will make it to July and that reopen date… If the date gets pushed again, I don’t know if it can survive say another six months to late 2021.

It should… But I don’t recommend you buy investments on shoulds.

Because of this, you need to be comfortable with this enormous risk before buying Carnival stock.

For me though, this risk is so large that I don’t feel comfortable recommending you buy its stock.

Conclusion

If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in one of our recent buy recommendations below.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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