These days, it’s tempting to sip on shipping line stock. Industry leader Carnival (NYSE: CCL) (NYSE: CUK) are trading 72% lower by 2020 and smaller competitors Norwegian Cruise Line Holdings (NASDAQ: NCLH) and Royal Caribbean Group (NYSE: RCL) are also among the biggest losers this year.
With a lot of market stocks going up and the market now in positive territory, there will be some stocks in the bottom fishing line. It could be a big mistake. A fatal flaw in chasing a stock that is sinking lower is the assumption that the ceiling is suddenly higher. Shares in Carnival could triple from here and remain nowhere as the year kicks off. It is only advantageous if the cruise line operator can get back to where it was by the end of 2019. Unfortunately for Carnival and its speculators it won’t be back in shape anytime soon.
The industry’s current situation is quite good. All major travel routes have canceled the US trip as well as most of their international trips in at least early November. About half of the passengers on the suspended flights requested a return. their money. The other half has agreed to take sweet credit for future trips. We are eyeing a cash flow crisis even as Carnival and its colleagues are back in the open seas.
The good news is that Carnival has raised over $ 10 billion through a series of sponsorship deals. Combine with billions of dong in operating and capital cost reductions after fleet shrinking through asset removal and postponement of new ship deliveries and the Carnival will exist. A month ago, they said they had enough liquidity to sustain it for another year, and that they had continued to make financial moves.
The bad news from an investment point of view is also that everything mentioned earlier is good news. The cost of additional liquidity is that more debt leads to more interest expenses, and that means lower returns. Many shares are issued in financing efforts that reduce earnings on a stock basis. Even if the Carnival’s fleet is at full power, it won’t land anywhere near last year’s highest profit margin.
A few weeks ago, Deutsche Bank analyst Chris Woronka gave a glimpse of Carnival’s thin future and cost. Between the $ 850 million in interest expenses he estimates that the cruise line will face by 2023 and the larger number of shares, the $ 4.40 a share it reports in last year’s earnings will only is $ 2.88.
In fact, the future may be even less profitable. Demand will not rise again soon even if the successful vaccine has been removed. A prolonged recession will keep prices under control, even if there are fewer ships in Carnival’s portfolio.
Things don’t have to end badly for the Carnival. The economy could recover quickly and consumer sentiment about safety in flight could soon be repaired. However, the assumption that Carnival simply needs to get back to its place when it was at its peak last year for stocks to recover to previous highs is unreasonable. The ceiling is not as high as many investors think, and overestimating short-term gains here is the worst mistake Carnival stock investors can make.