Carnival Spikes 11% On Demand Optimism; Analyst Warns Risk Remains

Shares in Carnival Corp (CCL) spiked 11% in Friday’s trading after the cruise company reported its second quarter earnings results- and revealed better-than-expected demand levels for 2021.

Specifically, Q2 Non-GAAP EPS of -$3.30 missed Street estimates by $1.54 while GAAP EPS of -$6.07 also fell short of consensus expectations by $4.47. However revenue of $740M beat by $2.19M, despite representing a drop of 85% from the same period last year.

Due to COVID-19, CCL paused its guest cruise operations in mid-March but now says it expects to resume operations in a phased manner. For instance, AIDA previously announced it will resume guest cruise operations from ports in Germany beginning August 2020 with three of its ships.

CCL also stated that it is reducing capacity by ship delivery deferrals and 13 expected ship dispositions. As previously announced, the company intends to accelerate the removal of ships in fiscal 2020 which were previously expected to be sold over the ensuing years.

Carnival CEO Arnold Donald noted, “We have been transitioning the fleet into a prolonged pause and right sizing our shoreside operations. We have already reduced operating costs by over $7 billion on an annualized basis and reduced capital expenditures also by more than $5 billion over the next 18 months.”

He added: “We have secured over $10 billion of additional liquidity to sustain another full year with additional flexibility remaining.”

In addition, the company has $8.8 billion of committed export credit facilities that are available to fund ship deliveries originally planned through 2023.

During the pause in guest operations, the monthly average cash burn rate for 2H is estimated to be $650 million. This includes $250 million of ongoing ship operating and administrative expenses, working capital changes, interest expense and committed capital expenditures and excludes scheduled debt maturities.

The pause in guest operations is continuing to have material negative impacts on all aspects of the company’s business, says Carnival, which continues to expect a net loss on both a U.S. GAAP and adjusted basis for the second half of 2020.

However, despite substantially reduced marketing and selling spend, the company continues to see demand from new bookings for 2021. For the most recent booking period, the first three weeks in June 2020, almost 60% of 2021 bookings were new bookings. The remaining 2021 booking volumes resulted from guests applying their future cruise credits (FCCs) to specific future cruises.

“As of June 21, 2020, cumulative advanced bookings for the full year of 2021 capacity currently available for sale remain within historical ranges at prices that are down in the low to mid-single digits range, on a comparable basis, including the negative yield impact of (future cruise credits) and onboard credits applied,” the company said.

Indeed, Carnival continues to expect any decline in the customer deposits balance in the second half of 2020, all of which is expected to occur in the third quarter, to be significantly less than the decline in the second quarter of 2020.

Following the update, Deutsche Bank analyst Chris Woronka reiterated his Hold rating on CCL with a $13 price target (20% downside potential).

“We certainly don’t dispute that the majority of headlines relevant to CCL… are decidedly positive on the surface, but we think this is a classic case of extrapolating news flow into future earnings potential with a perhaps unwarranted degree of optimism” the analyst warned investors.

“And while we are believers in the pent up demand angle, the fact remains that CCL’s interest expense in 2023 is likely to be ~$850m greater than it was in 2019 and its share count about 11% higher” Woronka continued.

Said differently, he estimates that CCL’s 2019 EPS would have been $2.88 (vs. the $4.40 reported) using anticipated 2023 interest expense and share count, all else (including EBITDA and D&A) being equal.

“With return of capital seemingly off the table for quite some time and a newly leveraged balance sheet that will still look to support additional ship purchases, we think multiples need to be reflective of the new reality” the analyst concluded.

Overall, analysts share his cautious approach with a Hold consensus and $16.51 average price target (2% upside potential). Shares in CCL have so far plunged 68% year-to-date. (See Carnival stock analysis on TipRanks).

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