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Sunday, February 5, 2023

Could Carnival Stock Retest Lows as Sailings Get Delayed? 

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On Aug. 5, cruise stocks wavered on news that they would again extend their no-sail date through October. This hit shares of Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH). Fortunately for investors, Carnival stock managed to stabilize for the rest of the week. 

The problem is, obviously, that without cruises there isn’t any real revenue. Without revenue, there’s no way to prevent these companies from seeing a bleed in cash flow, as certain costs continue without any business to offset them.

While docking the ships is one way to keep costs down, there’s still maintenance, insurance and payroll to keep up with. The reason Carnival stock and others were hit so hard is because investors were worried about liquidity. 

That concern was not limited to the cruise industry, but it was front and center with this group for a reason. Carnival cleared up those concerns with a stock offering and a bond deal to raise cash earlier this year. Still, concerns linger and delays continue.

Sailing Delay Puts Salt in the Wound

From the Cruise Lines International Association: “We believe it is prudent at this time to voluntarily extend the suspension of U.S. ocean-going cruise operations to Oct. 31.”

That is a risk that investors have been well aware of since the coronavirus sell-off hammered this group. However, as cases continue to soar and stay at elevated levels, it creates a lingering concern of just how long this delay will last.

It’s likely that the delay will be lifted before it’s completely safe to sail again. In that instance, believe it or not, there will be people who line up to board these ships. We know that based on how well Carnival’s bookings were for August a few months ago, when the company was hoping it would be back to sailing this month. 

While the die-hard vacationers will be back on ship as soon as they can, there are many customers that won’t consider cruises for a while. The added uncertainty related to the cruise delay creates more concern for investors. 

Will this group recover? Of course it will. Someday Covid-19 will be behind us and the world will move forward with what it was doing before. Sailing and vacationing aren’t going to be excluded from our so-called “new world.” 

However, buying a stock in the hope that it will someday recover is not a good enough catalyst for me. There’s too much uncertainty, not enough business and too much cash burn here for me to be all that interested. Particularly when there are companies that are seeing accelerating growth, sustainable momentum and have stocks that are in strong uptrends. 

Trading Carnival Stock

When Carnival reported its preliminary earnings report in mid-June, the results were not pretty. Revenue fell more than 85% and the company lost $4.4 billion. 

To be clear, I don’t think Carnival is facing a liquidity situation. While the cash burn continues, it did take steps to bolster its liquidity. As of the end of May, the company had $7.6 billion in total liquidity, while estimating cash burn for the second half of 2020 at $650 million. 

I think Carnival will survive. However, it could be a long time before it thrives — and those are the stocks I want to own. 

That observation is clear in the way the stock has been trading, too. Carnival stock gave us a nice double-bottom in March and April, before springing higher. After topping near $25 in June though, shares have fallen more than 40% as they trend lower. 

What’s unclear is whether Carnival stock will rotate higher and reclaim several key areas — like the 20- and 50-day moving averages — or trade below the current August low at $12.83 and put the May low in play at $11. 

Keep an eye on these levels moving forward: $12.83 then $11 on the downside and the 20- and 50-day moving averages on the upside.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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