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Is Carnival a Silent Portfolio Killer?

Some optimistic investors looking for buying opportunities might think their ship has come in with Carnival (NYSE: CCL). The stock price has fallen by more than 70% from its 52-week high. Also, despite the devastation that COVID-19 has wrought on both the company and the stock, one has to assume that travelers will return to cruising once the pandemic runs its course.

However, the cruise industry has had to repeatedly push back its return to the seas. Despite holding the largest market share in the industry, Carnival cannot afford to keep its fleet idle forever. With no end in sight to the pandemic, Carnival stock could turn into a portfolio killer rather than a bargain in waiting.

Image source: Getty Images.

Carnival has been bolstered by signs of hope

COVID-19 forced cruise ships into port across the world earlier this year. Consequently, Carnival took on a lot of water as the stock sunk between mid-January and mid-March.

Despite the bleak outlook, Carnival somewhat righted the ship as the stock bounced off of the spring lows. It would go on to spike above an intra-day high of more than $25 per share before pulling back. Since mid-summer, the stock has mostly traded in a range much closer to its March lows.

CCL data by YCharts

However, Carnival stock spiked higher last weekafter the Miami Herald reported that a federal judge had ruled that Carnival could resume cruise operations beginning on Dec. 1. Most cruise lines will likely be permitted to return to sailing on Oct. 31, assuming the Centers for Disease Control and Prevention (CDC) does not extend the current No Sail Order. However, Carnival has been on probation since 2017 since it pled guilty to dumping oil in the ocean. As a result, Carnival must attest to the environmental protection status of each ship before sailing again, pushing its relaunch date to Dec. 1.

While that ruling sparked optimism, a recent surge in COVID-19 cases across the U.S. and around the world could again delay Carnival's relaunch. Parts of Europe have already restarted lock down efforts, and it remains unclear whether the U.S. will follow. Consequently, growing infection rates could raise doubts as to whether Carnival can sail come Dec. 1. Moreover, even if Carnival sails, a lingering fear of the virus may also discourage some prospective travelers.

Can Carnival afford more delays?

Given the financials, Carnival stock could again sink as investors wonder how the company can operate amid virus-related concerns. Carnival brought in only $31 million in revenue in the latest quarter. That is down by more than 99.5% from year-ago levels when Carnival reported revenue of more than $6.5 billion. This led to a loss of $3.69 per diluted share, or just under $2.9 billion.

Furthermore, even if Carnival ships leave port in December, the current quarter ends on Nov. 30. This means the company is facing at least one more quarter with negligible revenue and a massive cash burn. The company holds almost $8.2 billion in cash. Nonetheless, even a company as large as Carnival can only operate so long at current loss rates. Moreover, the company holds about $18.9 billion in long-term debt.

The company is worth about $19.5 billion after subtracting liabilities from assets. Thus, turning to the debt markets will put further pressure on a strained balance sheet. This may force the company to further dilute the stock, an unappealing prospect when the stock has fallen below the company's book value.

The portfolio pain to come

Long-term shareholders have already seen this consumer discretionary stock fall to all-time lows. Unfortunately, reduced operations or further delays could mean a retesting of those price lows for portfolios.

Additionally, if the CDC extends the No Sail Order, the balance sheet will probably become further compromised. Consequently, Carnival stock could fall into penny-stock status or even face a possible bankruptcy as it runs out of options for new liquidity.

Investors understandably seek bargain stocks in hopes of boosting portfolios as these stocks come back. But not all low-cost stocks recover. Moreover, the recent ruling could become a head fake amid a new surge in coronavirus cases. Until the tradewinds turn favorable, investors should abandon ship on Carnival stock to avoid shipwrecking their portfolios.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.


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