Carnival Corporation: Plugging The Leak
Contributor since 2011 / 23440 Followers
Summary:
- Shares of Carnival Corporation & plc have been trading flattish in recent times.
- The 2023 guidance suggests breakeven could be achieved in 2023, after accounting for steep interest expense.
- While I am positively surprised by this trend, the Carnival Corporation debt challenge remains huge by all means.
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Towards the end of 2022, I concluded that shares of Carnival Corporation & plc (NYSE:CCL) were still sinking. This came after the company posted rough fourth quarter results with few green shoots seen as incremental capacity gains were offset by higher debt servicing expenses, as I believed that the hole was too large to create a realistic roadmap going forward.
2019 – The Last Normal Year
It gets a bit repetitive, but I think that it is important to understand what a normal year in the case of Carnival can look like. Pre-pandemic, Carnival was a business which generated nearly $21 billion in sales, with revenues derived from multiple cruise line franchises.
The company posted an operating profit of $3.3 billion, as the 700 million shares outstanding resulted into earnings of around $4 per share, with the same shares trading around the $50 mark. At those levels the company commanded a $35 billion equity valuation, or $47 billion enterprise valuation if we add a $12 billion net debt load. This debt was large in actual numbers, but operating a cruise line is a very asset-intensive business.
Revenues fell to $5.6 billion in 2020 on which the company posted a $9 billion operating loss (in part the result of large write-downs) as 2021 sales fell to $1.9 billion, while operating losses came in at $7 billion. Revenue recovered to $1.6 billion in the first quarter of 2022 and $2.4 billion in the second quarter, as the company still posted a huge $3 billion operating loss for this six-month period. This came as the company was hit hard by inflation and start-up losses.
Third quarter sales, in a seasonally stronger quarter, rose to $4.3 billion as operating losses narrowed to $279 million. This was encouraging, yet the company was incurring $1.6 billion in interest expenses (on an annual basis).
The company has seen quite a bit of dilution since the start of the pandemic as the share count rose from 700 million shares to 1.2 billion as of the third quarter, resulting in a $10 billion equity valuation with shares trading at $8 and change. That is part of the story as the net debt load has risen from $12 billion in 2019 to $30 billion. This shows that even if shares were down more than 80%, the enterprise valuation has only come down by about 20% since 2019. With the company issuing expensive notes to finance operations, it was very hard to get upbeat from a fundamental point of view.
While the company guided for some sequential improvements in 2023 results, mainly the result of higher occupancy rates, the reality is that the high occupancy rates of 85% made it hard to see much room for improvements (without large new capital expenditure requirements at least).
Muddling Through
Since the start of the year shares of Carnival have done quite alright, having risen from $8 to $12 in February, now trading at $10 and change again. Fourth quarter sales for 2022 rose to $3.8 billion as full year revenues were reported at $12.1 billion.
Despite the huge improvement (on an annual basis) the company still reported an operating loss of $1.1 billion for the fourth quarter period as net interest expenses trend at $1.6 billion a year while net debt rose to more than $30 billion. With 1.26 billion shares trading at $10 and change, the resulting $13 billion equity valuation works down to a $43 billion enterprise valuation here.
Towards the end of March the company provided an update for the first quarter with revenues up from $1.6 billion in the first quarter of last year to $4.3 billion for the quarter (which ends in February). Operating leverage made that operating losses narrowed to $172 million which is positive, although that net interest expenses trend at half a billion a quarter here.
Deferred investments made that net debt is stable around the $30 billion mark (in fact down a bit from recent quarters) as the company operates with 1.26 billion shares outstanding, with no dilution incurred over the past quarter.
For the year 2023 the company sees adjusted EBITDA at a midpoint of $4 billion amidst strong demand for its activities. This compares to a $382 million EBITDA number in the first quarter, which suggests that on average EBITDA should trend at a billion per quarter, and thus a six hundred million improvement on this front should be seen on a quarterly basis. This anticipated improvement makes that a realistic break-even level could be seen in the coming quarters (that is operating profits – interest expenses).
That would be great news, but still does not go a long way in addressing the debt load yet. While the company has delayed a lot of capital spending, it is the asset intensive nature of the business which makes that continued net capital investments, and thus cash flow requirements are seen. More so, occupancy rates are seen close to 100%, which is positive on the one hand, but suggests that room for sequential improvements is likely limited.
Concluding Remark
The truth is that I am more positive on Carnival Corporation & plc than I have been in a long time. The company is able to post operating profits this year according to the guidance and in fact should be able to cover (most) of the interest bill, both being promising developments. This ignites some imagination and makes that potential dilution can be avoided, although interest expenses will likely creep up as debt runs off. Analysts have become more positive on the names as well, including the likes of Susquehanna, with liquidity risks ¨ “effectively de-risked” throughout 2023.
While I am more upbeat based on the Carnival Corporation & plc prospects for realistic break-even levels this year, I fear the huge debt hole created, making me very cautious. After having been bearish for a long period of time, I am getting more upbeat, which in no way should be confused with an upbeat stance on Carnival Corporation & plc stock here.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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