Carnival: Still Sinking

Summary:

• Carnival Corporation has just posted tough fourth quarter results, with few green shoots seen.
• Incremental capacity gains are offset by debt servicing costs.
• The hole is simply too big to create any realistic roadmap out here.

In November, I noted that shares of Carnival (NYSE:CCL) were still seeing tough waters, in fact stormy weather, as a large convertible bond issue announced at the time was a clear sign of financial distress.

Even as operating losses have narrowed (in a rather spectacular way) it was a significant debt load and the associated debt costs which cast a dark shadow. This in combination with already high occupancy rates (which limit the potential to drive sales further) continue to create a very difficult set-up in my book. For those which read my pieces on the name in the past, it might get repetitive, but I first will go back to 2019, the last “normal” year of operations.

Some Perspective

Ahead of the pandemic, Carnival was a business which generated $20.8 billion in revenues from operating multiple cruise line franchises on which it earned $3.3 billion on an operating basis, as 700 million shares outstanding worked down to a $4 earnings per share number. At the time a $50 stock, the company commanded a $35 billion equity valuation and $47 billion enterprise valuation.

Net debt of nearly $12 billion was used to finance the asset-intensive operations, with these ships being carried at a $38 billion valuation on the books.

When Covid-19 arrived, sales fell to just $5.6 billion in 2020 on which a staggering $9 billion loss was reported, to an important extent explained by (additional) depreciation and amortization charges. Revenues fell to just $1.9 billion in 2021 as operating losses rose came in at $7 billion.

2022 was a year of somewhat of a recovery. First quarter sales rose to $1.6 billion and second quarter revenues rose to $2.4 billion. Despite this encouraging trend, the company posted an $3 billion operating loss for the six-month period, due to higher start-up costs, inflation and staff shortages. Third quarter sales rose to $4.3 billion, quite encouraging, as operating losses narrowed to $279 million, quite impressive. While this is encouraging, the company is incurring interest expenses at a run rate of $1.6 billion a year here, a number which is rising by the way, all ahead of taxes. Moreover, the third quarter is seasonally quite a strong quarter of course.

Comparing the situation to 2020: net debt of $12 billion has risen to $27 billion as the increase in net debt has been limited by the fact that a lot of shares have been issued. Since the start of the pandemic about half a billion shares have been issued, resulting in a share count of 1.2 billion by now. With the shares trading at $8 in October, this means that even as shares were down 85% since the outset of the pandemic, the enterprise value is down by less than 20%.

With the company issuing expensive 2027 notes which carried a 5.75% rate, while being attached with conversion options, it was clear that capital was expensive for the company and thus its shareholders, as I called shares uninvestable given the very poor fundamentals.

Struggling Along

With exception to a brief run to the $11 mark in November, shares of Carnival continue to trade near their lows, now trading at just $8 again. Just days ahead of Christmas, Carnival posted a business update for the fourth quarter.

The company posted a GAAP net loss of $1.6 billion and adjusted loss of $1.1 billion, marking actual increases from the third quarter again, due to seasonality to an important extent as well. The company posted sales of $3.8 billion on which a GAAP operating loss of $1.1 billion was posted. This made that full year sales rose from $1.9 billion in 2021 to $12.2 billion in 2022, yet operating losses only narrowed from $7.1 billion to $4.4 billion.

One small bright light is that the company expects at least 90% occupancy rates in 2023, marking a roughly 5 point improvement from this year. Costs are seen up 8% in local currency terms, ex fuel, and while it remains anyone’s guess what prices will do, some fuel savings are anticipated in terms of volumes in the upcoming year on the back of new installed technologies.

What Now?

While some further sequential improvements can be expected in 2023, the uphill battle is huge. After all, the company still lost over thirty cents on every dollar in revenues in 2022, with occupancy being high already and inflation and other items limiting the extent of the improvements next year.

That is of course still ahead the costs to service the debt, with net debt now posted at $30.5 billion. With interest costs over time adding to the interest bill (as maturities) roll off, this remains a huge headwind as the share count has been diluted to 1.26 billion shares already.

For me, the green shoots are too small to make a dent as any fundamental investment remains merely a gamble here, with real restructuring needs to provide any appeal here to either bond or share investors.

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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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