Carnival Corporation: Attractive Stock before Q3 Results

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(C) Reuters. Carnival Corporation: Attractive Stock before Q3 Results

After COVID-19 disruptions, the global cruising industry seems to be on a recovery path. It’s expected that the cruising industry will generate revenues of $6.6 billion in 2021. That’s almost twice as much revenue than it did in 2020.

Carnival (NYSE:CUK) Corporation (CCL) is one stock that seems attractive from the cruising industry. The stock reached $31.52 in June, though a correction followed with concerns related to the Delta variant of COVID-19. (See CCL stock charts on TipRanks)

The stock has witnessed some consolidation around current levels at $23 per share. I am bullish on CCL stock at current levels. With the company scheduled to report Q3 2021 results on September 24, the stock is worth considering.

While the company’s results will provide further insights on bookings for 2022, there are two important points to note.

First, the company recently announced that 50% of its U.S. fleet is back in service. As more ships are deployed and capacity utilization improves, Carnival is likely to see reduced cash burn.

Further, data suggests that U.S. COVID-19 cases have started to dip from its latest peak. It’s also worth noting that 55.5% of the U.S. population is fully vaccinated. If cases continue to dip, it will further accelerate the company’s booking momentum for 2022.

The company’s cumulative advance booking for 2022 was already ahead of 2019 levels, as of Q2 2021. Last month, Norwegian Cruise Line (NYSE:NCLH) also confirmed a strong demand for cruises in 2022. Strong growth in customer deposits in Q3 is likely to be a potential stock upside catalyst.

Strong Cash Buffer

Cash burn has been a concern for all companies in the travel and tourism industry. For the first half of 2021, Carnival Corporation reported cash used in operations of $2.6 billion.

What’s important is that Carnival ended Q2 2021 with cash and equivalents of $9.3 billion. This liquidity buffer is likely to ensure that the company navigates the crisis without additional dilution.

On the flip-side, Carnival Corporation reported total debt of $30.8 billion as of Q2 2021. For the first half of 2021, Carnival reported interest expenses of $835 million. Even with debt refinancing to lower the debt servicing burden, the company is likely to have an annual interest outgo of $1.5 billion.

It’s worth noting that in 2018 and 2019, Carnival reported annual operating cash flows of $5.5 billion. Once operations are back to the pre-pandemic levels, the company can swiftly pursue deleveraging.

However, it would take few years for the company to repair its balance sheet to investment-grade levels.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, CCL stock comes in as a Hold, with four Buys, two Holds and four Sells assigned in the past three months.

The average CCL price target is $27.91 per share, implying 18.2% upside potential from current levels.

Bottom Line

Carnival Corporation stock seems attractive ahead of Q3 2021 results. While cash burn is likely to sustain, the company’s booking outlook for 2022 is a key stock upside catalyst. Additionally, as more cruise ships are operational, cash burn is likely to reduce in the coming quarters.

In terms of risks, the balance sheet needs repair. Further delay in recovery for the industry might necessitate leveraging for debt servicing.

However, with pent-up travel demand coupled with vaccinations, there are more reasons to be positive than concerned.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.

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Carnival Corporation: Attractive Stock before Q3 Results

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