Carnival CorporationShort
CCL will become a penny stock or go bankrupt
Fundamentally this stock is going to become a penny stock or even go bankrupt if there isn't a speedy recovery in the cruise line industry. I see a lot of people thinking this a "value pick" and nothing could be further from the truth.
Pre-covid between 2010-2019 their operating income fluctuated between $1-3 billion with $200-$300 million in interest expenses. Also it should be noted pre 2015 when oil was around $90-100 a barrel their operating margin was around 10% compared compared to the high teens when oil was cheaper. During this period their operating income was in the sub $2 billion with only $200-$300 million of interest expenses.
Now when you factor in they increased their share base by 65% and completely destroyed their balance sheet taking a additional $20 billion in debt their outlooks is pretty much sealed as their their interest expense is now at about $1.5 billion per year. Additionally half this debt has variable interest rates which is a double edged sword, strong economy interest rates go up and their interest rates may go up, if the economy weakens interest rates go down but their business declines as well. They also have lost the majority of equity on their balance sheet not giving them a cushion a safety in the future.
So now even if we are optimistic and overnight their business returns to a comparable period of where their operating margin was between $1-2 billion their interest expense will eat up the majority of that profit. This leaves them with maybe a few hundred million in profit. To even justify the current value very optimistically they would need to currently making $1 billion net profit which leaves their EPS around maybe 75 cents a share at about a 12PE.
Even in a recovery scenario I thinkCCL would trade sub 10 PE due to their extremely damaged balance sheet with very high interest expense, the fact there will be no dividends any time soon, the debt they accrued would take over a decade to pay off, and the ongoing perceived fragility of this industry.
While saying all of this their next quarter they will be reporting what is typically the best season of the year and with everyone traveling the numbers may give investors hope and create a dead cat bounce.
If they continue to have unprofitable quarters their chances of bankruptcy or restructuring gets higher and higher.
Pre-covid between 2010-2019 their operating income fluctuated between $1-3 billion with $200-$300 million in interest expenses. Also it should be noted pre 2015 when oil was around $90-100 a barrel their operating margin was around 10% compared compared to the high teens when oil was cheaper. During this period their operating income was in the sub $2 billion with only $200-$300 million of interest expenses.
Now when you factor in they increased their share base by 65% and completely destroyed their balance sheet taking a additional $20 billion in debt their outlooks is pretty much sealed as their their interest expense is now at about $1.5 billion per year. Additionally half this debt has variable interest rates which is a double edged sword, strong economy interest rates go up and their interest rates may go up, if the economy weakens interest rates go down but their business declines as well. They also have lost the majority of equity on their balance sheet not giving them a cushion a safety in the future.
So now even if we are optimistic and overnight their business returns to a comparable period of where their operating margin was between $1-2 billion their interest expense will eat up the majority of that profit. This leaves them with maybe a few hundred million in profit. To even justify the current value very optimistically they would need to currently making $1 billion net profit which leaves their EPS around maybe 75 cents a share at about a 12PE.
Even in a recovery scenario I think
CCL would trade sub 10 PE due to their extremely damaged balance sheet with very high interest expense, the fact there will be no dividends any time soon, the debt they accrued would take over a decade to pay off, and the ongoing perceived fragility of this industry. While saying all of this their next quarter they will be reporting what is typically the best season of the year and with everyone traveling the numbers may give investors hope and create a dead cat bounce.
If they continue to have unprofitable quarters their chances of bankruptcy or restructuring gets higher and higher.
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