Travel and leisure industry has been facing several challenges since the emergence of COVID-19. In 2021, just as the industry was starting to revive, it took a hit from an outbreak of a new variant, Omicron in South Africa. The industry nosedived as the holiday makers cancelled or postponed their travel plans.
A recent announcement by Anthony Fauci, Chief Medical Advisor to the President of United States, lends optimism. It indicates that while the new variant is more transmissible than the Delta variant, it is milder and is more easily evaded with the current COVID-19 vaccines. Reflecting this sentiment, shares in the industry bounced back. Carnival Corporation (CCL) gained 8.08% on the news. CCL owns and operates cruise ships to 700 port destinations around the world.
I am bullish on this stock. The company’s shares are already beaten down and should rise from here, based on the following reasons.
Lower Price
CCL shares are currently trading near its 52-week low. It is also below its 50-day and 200-day moving average. The stock price has been down 16.6% over the last one-year, in comparison to the S&P 500 (SPX), which gained 24.49% over the same period. The lower price has given an opportunity to invest in the stock from a long-term perspective.
Markets are assumed to be discounting the company based on two reasons:
One, traveling has not gained normalcy, as many are still hesitant to travel in crowds. Although the launch of vaccinations and the re-opening of the economy for traveling are favorable, it will take time for the company to return to its pre-pandemic level. Further, cruise operators will not be able to operate at 100% capacity, at least in the near-term, to follow best health and safety measures.
Two, CCL is overleveraged. Even if the company fully operates, the majority of the earnings would go towards repaying debt, leaving hardly any for shareholders.
CCL’s Debts are Still Below those of Peers
At the end of 3Q21, CCL had total debt of $32.64 billion. It is no surprise that the cruise industry is one of the most affected industries by the pandemic. The industry came to a complete standstill due to social distancing measures. To stay afloat, many businesses in the industry had to resort to debt financing.
Even though debt has increased, CCL debt levels are still lower than those of its peers. Total debt-to-capitalization ratio has increased from 58.0% in 2020 to 68.7% in Q3’21. It is less than that of its closest competitor: Royal Caribbean’s (RCL) total debt-to-capital ratio increased from 69.5% in 2020 to 76.9% in 3Q21.
As the company becomes fully operational, higher cashflows should enable it to reduce debt levels.
Booking Volumes and Occupancy Showing Traction
Booking volumes were higher in the 3Q21 than 1Q21. Although the outbreak of Delta variant in August suppressed bookings for near-term sailings marginally during the month, it stabilized in September. Management pointed out that advanced booking volumes were higher for the 2H22 than the volumes experienced in a very robust year of 2019. In fact, demand for cruising has been so much that the company opened bookings for 2023 earlier than planned. Given increased demand for cruising, management aims to increase fleet capacity from 35% in 3Q21 to 65% by December 2021 and 100% by the 1H22.
Occupancy rate is also trending higher, with 39% in June, 51% in July and 59% in August. I expect this to continue, with the U.S. lifting its travel ban from 33 countries, and a successful roll out of vaccinations in many countries.
Pick-up in Travel Demand
As per a report by Morning Consult in December 2021, approximately 59% of U.S. adults showed interest in taking a vacation once the pandemic is under control. A survey conducted by ABTA revealed people are booking ahead for cruises. Almost 58% of people surveyed showed a preference for ocean cruising, and 31% for river cruising.
Further, recent developments, including vaccinations for children over 5 and a third booster for adults, should propel demand.
With the existing demand and limited capacity, the company is focused on growing, with higher pricing through bundled offers. This has contributed to the $630 million increase in guest deposits.
Wall Street’s Take
Turning to Wall Street, CCL has a Hold consensus rating, based on three Buys, four Holds, and one Sell ratings assigned in the past three months. The average CCL price target of $30.00 implies 64.11% upside potential.
Concluding Remarks
CCL is the largest cruise line in terms of fleet size. It has a proven operational track record. With the travel trend picking up, the company is experiencing higher bookings and occupancy for cruises. As such, customer deposits have increased. These positives should help the company to bring its debt levels down. As the stock is currently trading at a discount to its peers and is near its 52-week low, it appears to be the right time to make an investment, from a long-term perspective.
Disclosure: At the time of publication, Sakshi Agarwalla did not have a position in any of the securities mentioned in this article.
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