Which of the Cruise Stocks Will Rule the Waves? $CCL Stock

NYSE:CCL   Carnival Corporation
$77 billion wiped out in a matter of months; that’s how much the cruise industry lost between March and September 2020. The once booming industry was in for a bumpy few years when the pandemic hit and it became one of the first hotspots to catch the media’s attention. With everyone locked in their houses the tourism industry took quite a hit, and cruise stocks plummeted to record lows. Two of the hardest hit cruise stocks were Norwegian Cruise Lines (NCLH) stock which fell from $59.65 per share to just $7.80 in March and Carnival Cruise Line (CCL) stock which dropped 84% to its lowest price since 1992.

Now that Covid concerns have eased, the tourism industry is rebounding as people begin planning holidays again. However, cruise stocks like Norwegian Cruise line stock and Carnival Cruise stock have been struggling to recover. Both major cruise lines recently announced that COVID regulations will no longer be enforced onboard ships and as pent up demand for traveling leads to increasing numbers of travelers, the tourism sector appears on track to recover. But will two of the three biggest cruise line stocks return to their pre-pandemic highs?

Both cruise line stocks are laden with debt from the pandemic, and neither have attracted the same number of passengers as they had pre-pandemic. However, demand for cruises has not disappeared and the cruise line that survives will have the opportunity to take up more of the once booming market. While their stocks’ recovery may take years, these bottomed out cruise stocks could offer a unique opportunity for investors willing to wait for passenger numbers to fully recover.

COVID’s Toll on Cruise Stocks
A lifetime ago, which was apparently only 2019, the cruise industry was seeing healthy growth and became a big market in the tourism sector. Some even argue that the $150 billion cruise industry was the fastest growing part of the tourism sector. At the time, this seemed to be the case with the number of cruisers reaching an all time high of 29.7 million in 2019. An additional 32 million passengers were expected for 2020 as the industry grew at a CAGR of 11%. What could possibly go wrong? As it turned out, absolutely everything.

A few months later, the pandemic hit and some of the first COVID hotspots were cruise ships. In February 2020, the infamous Diamond Princess – owned by Carnival Cruise Line – was the first to catch the media’s attention when 800 of its passengers contracted COVID-19. This was only the first cruise ship to be nicknamed a “floating petri dish” and the rest of the industry soon fell like dominoes.

This was a disaster for cruise line stocks. In six months, the industry had lost $77 billion and annual revenue for the big three cruise lines – Carnival Cruise Line, Royal Caribbean, and Norwegian Cruise Line – fell 73-80%. In the first four months of the pandemic, CCL suffered a net loss of $4 billion and it was burning through $650 million a month. The company eventually had to sell several ships to cut expenses.

Tricky Road to Recovery
Even as the world began to recover, traveling proved to be more complicated than many expected and cruise lines have faced many difficulties attracting passengers back. Cruises to nowhere were one of the first solutions since ships were not allowed to dock anywhere. However, these trips were not in high demand and the solution was soon abandoned.

Once demand returned, CCL and NCLH were faced with a new problem. Remember the employees the cruise lines laid off during the pandemic? Well, hiring back old and new personnel proved to be an issue resulting in shorter restaurant hours for Carnival and canceled trips for Norwegian. Even now, CCL and NCLH employ less people, but pay them more. Vacancies as well as stringent COVID regulations proved to be a hurdle for the industry at the start of its recovery.

The Light at the End of the Tunnel
However in 2022, many popular tourist destinations lifted COVID restrictions as well as cruise lines. As is, the industry is expected to perform just slightly worse than it did in 2019 – a huge improvement from 2020 and 2021. Despite demand picking up, the debts accumulated by both NCLH and CCL present a long-term concern to investors watching cruise stocks for signs of recovery.

Now, the question is which cruise stock has the best chance for a full recovery? Two cruise stocks attracting investor’s attention are CCL stock and NCLH stock. Carnival is the largest cruise line in the world and although Norwegian is the third largest, it has a much smaller market share. Both companies attract different audiences with Norwegian catering to wealthier passengers and Carnival serving a more international clientele. While both companies have a long way to recovery, their different strategies for survival, current financial health, and passenger numbers could indicate whether CCL stock or NCLH stock is the better long-term investment.

CCL Stock: A Mounting Pile of Debt
At first glance, CCL may look like a clear winner with 45% market share of the global cruise industry and a fleet of 91 ships. The company, however, could be capsized by the debt it has accumulated to stay afloat in the wake of the pandemic. The sheer amount of long term debt and its debt structure could prove to be Carnival’s Achilles’ heel.

Quarters Revenue Net Income / Net Loss
Q1 2020 $4.7 billion $(781) million
Q2 2020 $740 million $(4.3) billion
Q3 2020 $31 million $(2.8) billion
Q4 2020 $34 million $(2.2) billion
Q1 2021 $26 million $(1.9) billion
Q2 2021 $50 million $(2) billion
Q3 2021 $546 million $(2.8) billion
Q4 2021 $1.2 billion $(2.6) billion
Q1 2022 $1.6 billion $(1.8) billion
Q2 2022 $2.4 billion $(1.8) billion
Q3 2022 $4.3 billion $(770) million

The company’s revenue fell off a cliff dropping from $4.7 billion in Q1 2020 to a low of $26 million in Q1 2021. CCL is starting to show signs of recovery since its revenue has been increasing at an average rate of 281% per quarter since Q2 2021. While revenue has been ramping up very quickly, its revenue in Q3 2022 was $4.3 billion – still almost $2 billion less than in Q3 2019.

The lower number of passengers is partly to blame for this drop in revenue. So far, CCL has carried 4.5 million fewer passengers than the 9.7 million carried during the same nine months in 2019. So while demand is evidently recovering at an impressive rate, it’s going to take Carnival some time to make up the difference. Since the elderly are some of the most avid cruisers and are also the most at risk for COVID, these numbers could take years to recover. After all, CCL only started reporting passenger numbers again in Q1 of this year.

However, these problems are not specific to the cruise industry. The airline industry, for example, may seem to be almost performing at 2019 levels, but that is largely due to an increase in ticket prices. In 2021, U.S. airlines carried 674 million passengers – 27.3% less than 2019. While the industry is still improving, its inability to recover fully shows that the cruise industry’s issues are not unique.

A more pressing issue for CCL is how its debts have increased at an alarming rate since Q2 2020, leaving Carnival in a tricky financial situation. Its long-term debt climbed from $9.7 billion in Q1 2020 to $29.8 billion in Q1 2022. For the last two quarters, however, its debt has been decreasing at an average rate of 2.25% leaving it with $28.5 billion in long term debt.

Carnival’s debt structure is also a cause for concern. With $7 billion cash on hand and $28 billion in debt, CCL has more than $1 billion in debt that must be repaid over the next 18 months. It also recently issued $2 billion in bonds with a 10.375 coupon rate in order to pay the interest on the money it previously borrowed. Since this coupon rate represents the interest rate at which the company is expected to pay back those who invested in its bonds, this means that Carnival has to pay back a considerable amount just in interest. In short, this coupon rate indicates how desperate CCL is for cash.

Although CCL has $5-6 billion more cash on hand than it did in Q4 of 2019, its $7 billion in cash may not last very long. CCL could run into problems since it has had an average net loss of $1.49 billion per quarter since Q1 2022. Although its cash on hand has increased from $6.4 billion in Q1 to $7 billion in Q3, the company will soon need to pay interest on its debts as well as other expenses which will eat away at its cash runway.

This debt piled up during the pandemic when Carnival made a total loss of $10 billion in 2020. To put things in perspective, Carnival Cruise Lines’ long-term debt increased three times while Norwegian’s roughly doubled. Meanwhile, the value of CCL’s assets has also been falling by almost $1 billion each quarter since Q1 2022 due to depreciation in the value of its property and equipment. But Carnival’s situation may be less dire if its revenue continues to increase at the same rate – putting it on track to outperform 2019 revenues soon.

Another thing to note is that while the revenue from ticket sales is still not at pre-pandemic levels, onboard spending by passengers is comparatively much higher than pre-pandemic. The ratio of ticket sales to onboard spending in Q3 2019 was 2.4, but in Q3 2022 it was 1.5. In Q3 of this year, CCL reported onboard spending of $1.7 billion while revenue from ticket sales equaled $2.59 billion.

Carnival noted in its Q3 earnings call that onboard revenue was up significantly from Q3 2019 in part due to increased spending from guests. Management also noted an over 50% increase in pre-cruise sales for onboard activities which contributed to higher revenue. This is likely due to Covid lockdowns which left people eager to spend on their vacations. This shift in consumer behavior is obviously good news for companies like Carnival since it helps offset the revenue lost from lower passenger numbers.

Another positive sign has been Carnival’s lower expenses. Given its debt situation and cash burn over the last two years, Carnival needs to save every penny it can. So far, Carnival has hosted 5.2 million passengers this year. Over the same 9 month period in 2019, Carnival reported 9.79 million passengers, meaning it has had almost half as many passengers this year as in 2019. While some of its cost reduction could be due to the lower number of passengers, its ability to continue lowering its expenses could be key to its survival.

So far, Carnival has spent 28.6% less on food in the first nine months of this year than it had over the same period in 2019. It also spent 4.1% less on payroll and 46.3% less on commissions, transportation, and other in that same period. You might expect payroll expenses to decrease more significantly since Carnival employs less people than in 2019, but employers across the board have raised wages to attract workers back post-pandemic.

It’s also worth noting that Carnival has managed this year’s volatile oil prices much better than Norwegian. For this nine month period, CCL’s fuel expenses increased 30.9% compared to the same period in 2019, whereas Norwegian’s increased 69.1%.

Carnival Stock Forecast
Although CCL suffered a great deal during the pandemic in terms of cash burn due to its size, that will no longer be the case as booking volumes return to normal. Instead, CCL will be in a position to benefit from its industry-leading scale. An important part of Carnival’s plans for achieving strong profitability in 2023 is marketing. Historically, CCL has performed well among “new to cruise” guests which have typically accounted for one third of its passengers. This is an important metric to watch since attracting new guests and retaining them will contribute to continued growth for the brand.

As is, CCL has been ramping up advertising spend. During the pandemic, CCL focused its advertising on past guests but it is now expanding to actively target those who are new-to-cruise. This investment could pay off for the company in 2023 as it attracts new guests to its brand – helping with its load factor – but also helping much farther down the road. While booking volume is not currently a concern, CCL is working to fill its ships at good pricing. Laying the groundwork and making inroads with new to cruise customers will help Carnival secure bookings as far as 2.5 years out. Additionally, focusing on pricing improvements as it returns to its historical passenger loads is expected to drive free cash flow and help accelerate Carnival’s path to investment-grade credit ratings.

Overall, the outlook for the cruise industry appears promising now that it is more aligned in terms of Covid restrictions with land-based alternatives such as resorts. This has increased demand across the board for cruises and Carnival is no exception. The company has reported that booking volumes for its 2023 book business and pricing are at much higher levels. In fact, where demand would typically dip seasonally, Carnival has instead found no signs of slowing.

Another bright spot has been the sequential improvement QoQ in costs which is expected to continue into Q4. However, the ramp up in advertising expenses may affect Carnival’s cost cutting in 2023. Despite this, ticket prices for the entirety of 2023 are higher than before and onboard revenue is expected to be significantly higher. Carnival’s management appears confident that these tailwinds could result in a record year for onboard revenue.
With this in mind, CCL is anticipating “strong EBITDA” in 2023, however the effects of fuel prices and the valuation of different currencies could change that. CCL noted that the USD’s strength has already impacted its revenue per passenger. Because Carnival has a more international clientele, it is particularly vulnerable to weakening currencies which will likely carry into Q4 and possibly into 2023 as well.

Additionally, CCL anticipates that it will be impacted by future cruise credits in 2023. These credits were given to passengers whose trips were impacted by Covid and typically provided an incentive as well. These credits impacted revenue per passenger day for Q3 and are expected to affect 2023 yields by less than 1 percentage-point. While Carnival’s debts present a particular risk to investors which have already been diluted roughly 11.2% this year, the major cruise lines are anticipating a successful “wave” in 2023 as bookings continue to build for the summer season. This could offer some short term relief for Carnival cruise stock on its path towards long-term recovery.

CCL Stock Earnings Forecast
As is, Carnival is recovering from the impacts of the pandemic, albeit slowly, and its Q4 earnings on December 20th could provide more insight into the stock’s future. CCL’s upcoming earnings will likely include its guidance for 2023 and a look at the company’s pathway to profitability. However, CCL has missed on earnings for the last eight quarters and will likely miss on its EPS estimate of -$0.89. Revenue estimates put CCL at $3.97 billion after the company reported $4.3 billion in September.

In Q3 CCL’s EBITDA earnings turned positive which shows the company’s financial progress since resuming sailings. Another bullish sign for CCL stock was news from its management that future booking volumes have surpassed 2019’s. Since passenger numbers are a key metric for cruise stocks, Carnival’s ability to return to pre-pandemic passenger loads could signal a turn around for the stock.

Technical Analysis
While CCL stock price may never test pre-pandemic highs again, there is a chance for CCL stock to regain some of the ground it lost if it continues cutting its expenses and attracting passengers. After disappointing Q3 results, CCL stock made a new low of $6.26 – breaking its support at $7.94 from March 2020. Since then it has rebounded roughly 50% and the current Carnival stock price is $8.08.

CCL stock shows a support near $7.42 next to a gap up. CCL stock could continue downtrending until it fills this gap. But if its support at $7.42 continues to hold through earnings, that could be a bullish sign for investors. As the outlook for 2023 continues to improve, CCL stock may retest its resistance at $11.15 or $14. Its worth noting that JP Morgan, Susquehanna, and Barclays have given CCL stock price targets of $13 – $15 which indicates that this could be a fair value estimate for the stock in 2023.

Meanwhile, accumulation has begun dropping since climbing at the start of July. Investors’ enthusiasm during the summer was likely triggered by cruise stocks’ seasonal demand as well as easing Covid restrictions. Overall, investors appear to be holding CCL stock for the long-term with some exiting their positions ahead of earnings. Currently, the RSI is near oversold at 32 and the MACD is bearish to the downside. In the short term, Carnival has earnings approaching and depending on management’s guidance, CCL stock could test its resistance at $11.15 with positive results.

Which of the Cruise Stocks Will Rule the Waves?
On the bright side, the cruise industry as a whole shows considerable upside potential. There are many unserved and underserved markets which cruise lines could tap into in the future. Especially in comparison to the options for land based vacations, the cruise industry has a lot of room for expansion. Additionally, many tourist destinations have removed COVID testing requirements for entry and many countries in Asia have begun reopening to cruise lines. These catalysts will help increase demand for cruises in the near term.

Spending on cruises is also showing an uptick as Bank of America reported monthly core cruise spending was up 18.6% in November compared to 2019. This was a huge step up from the months before when growth was either declining or in the single digits compared to pre-pandemic levels. With wave season coming up, it appears that cruise stocks could be a worthwhile investment. However, when comparing Carnival cruise stock to Norwegian Cruise Line stock there is no easy winner.

CCL appears more hampered by its debts than NCLH and is believed to be discounting fares heavily to sell cruise trips. Amidst inflation and rising fuel costs this strategy has made it more difficult for CCL to earn a profit. On top of this, Carnival has an aging fleet and will be negatively affected by its decision to sell ships during the pandemic once demand fully recovers. Updating its fleet will also contribute to its future expenses.

Carnival currently has $35.3 billion in debt which cost $1.6 billion in interest payments last year. Considering that interest rates have been increasing since then, future interest payments will likely be even higher. Although analysts expect CCL to make enough in pre-tax profits in 2023 to pay off the costs of its debt while still making a profit, there is very little room for error.

Considering that quantitative tightening may hurt demand for cruises as consumers monitor their spending, CCL could run into issues down the line since a large part of its audience is from outside the United States. On top of this, the effects of discounting its tickets to attract more passengers could also lead to repercussions in 2023. These promotions and future cruise credits resulted in its Q4 cumulative advanced book position coming in below historical levels.

While CCL does have two ships on order in 2024 and one in 2025, it does not plan to expand its fleet as aggressively as NCLH. Considering Norwegian’s younger fleet, higher revenue per passenger, and dominance in the high-end market, NCLH stock could yield higher returns in 2023. NCLH is already one of the fastest growing cruise stocks in terms of sales growth and has held up stronger in the face of this market downturn then CCL stock. Investors should watch NCLH and CCL’s passenger numbers in the coming quarters since this will signal a return to historical load factors. If Norwegian is able to attract more passengers than it was historically capable of while also generating more revenue per passenger than CCL, it could be a sign that NCLH stock is on track to a profitable post-pandemic recovery.

Quarter CCL Passengers NCLH Passengers
Q1 2019 2,937,000 645,052
Q2 2019 3,101,000 682,935
Q3 2019 3,752,000 726,921
Q4 2019 3,076,000 640,804
Q1 2020 3,063,000 499,729
Q2 2020 426,000 N/A
Q3 2020 N/A N/A
Q4 2020 N/A N/A
Q1 2021 5,000 N/A
Q2 2021 27,000 N/A
Q3 2021 340,000 57,931
Q4 2021 851,000 174,517
Q1 2022 1,011,000 191,150
Q2 2022 1,652,000 393,943
Q3 2022 2,571,000 526,838

In an interview with Yahoo Finance, Norwegian Cruise Line’s CFO – Mark Kempa – shared that “ we firmly believe, given our trajectory today, that with our existing cash on hand and our expected organic cash flow, we are going to be able to pay off our debt in the normal course of business by just good old-fashioned earnings and cash generation.”

This is a bullish outlook considering that over the next two to three years NCLH will need to pay off roughly $1 billion per year in debt. With $12.8 billion in long-term debt, the road ahead presents some risk but Kempa emphasized that Norwegian’s BOD had no intention to dilute shareholders in order to pay down debt or to delever. In light of NCLH’s opportunity to expand, its strategy for maintaining price integrity, and its ability to attract wealthier passengers, NCLH stock appears less risky than other cruise stocks.


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