December 3, 2022

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Motley Fool Issues Rare “All In” Buy Alert
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
Cruise line Carnival (CCL -6.06%) has become a popular comeback story on Wall Street. COVID-19 did a lot of damage to tourism-focused companies like Carnival, which are just now getting their sea legs back under them. But an investment in the cruise operator gets more complicated as you peel back the layers of the onion.
Carnival could hit the high seas at full capacity over the next several years. Still, its complicated financial situation could lead to troubles and subpar returns for investors. Here is why you’re better off staying off this cruise stock.
The pandemic brought the company to its knees. The last place you want to hide from an airborne virus is on a ship, isolated at sea among hundreds of strangers. Ships are also expensive to maintain and operate, and the travel restrictions resulted in billions of losses for Carnival, which was burning an average of $650 million of cash every month in the early phases of the pandemic.
The company had to take drastic measures to survive, and that included borrowing a ton of money. You can see in this chart its debt has more than tripled from the start of 2020 to today.
CCL Total Long Term Debt (Quarterly) Chart
Data by YCharts.
It’s not ideal, but the surge in debt was necessary to Carnival’s survival. Investing isn’t about what once was; it’s about looking forward, and investors must now grapple with a company whose balance sheet has taken on water.
This is where things get complicated for Carnival. The company has many loans maturing over the next several years. For example, it has $991 million of debt coming due in the fourth quarter of this year. It has a total of $2.4 billion coming due in 2023 and another $4.9 billion in 2024. A whopping $16.9 billion is expected to mature through 2026.
The problem is Carnival isn’t a business that produces tons of cash profits. It spends billions each year on its fleet to maintain it. Operating profits were $5.5 billion in 2019, the last year before the pandemic. However, it spent $5.4 billion on property and equipment (ships) that year, rising steadily from $2.9 billion in 2017. That leaves the company with a few billion dollars in free cash flow in a best-case scenario. Historically, free cash flow has been much lighter as you can see below.
CCL Free Cash Flow Chart
Data by YCharts. Reported on a trailing-12-month basis.
Carnival’s free cash flow was a negative $882 million in its fiscal 2022 third quarter, ended Aug. 31. In other words, even when it’s actively trying to conserve cash, the need to open its business is resulting in significant cash burn.
The company does have $7.1 billion in cash on its balance sheet, so near-term liquidity shouldn’t be an issue. Carnival will pay its bills due in the fourth quarter.
But this combination of ongoing cash burn and loan repayments could dwindle its reserves fairly quickly. There’s a good chance Carnival must begin refinancing debt instead of paying it off, and the current macroeconomic environment probably won’t be kind to such an effort. The company is in financial distress with interest rates currently between 2% and 8% (some of them variable) on its loans coming due over the next several years. Central banks around the world are raising interest rates to combat inflation, so new loans might be even more expensive.
CCL Total Interest Expense (TTM) Chart
Data by YCharts. TTM = trailing 12 months.
As a result, Carnival will spend a lot of money on interest expenses, which will only subtract from its cash profits, limiting its ability to service and pay down its debt.
Compounding is a powerful force, and the company is in grave danger of ending up on the wrong side of it. A bear market tends to bring down all ships at sea, and there are better opportunities for investors looking for potential deals on stocks that can rebound. Chasing a company with looming financial woes like Carnival seems unnecessarily risky right now.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Market-beating stocks from our award-winning analyst team.
Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.
Discounted offers are only available to new members. Stock Advisor list price is $199 per year.
Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.

Market data powered by Xignite.

source

Leave a Reply