Travel and tourism stocks have been recovering. Understandably so, in fact, given all the positive vaccine news that we’ve seen in recent weeks. However, the cruise lines, including Carnival Cruise (NYSE:CCL) have hit a bit of a bump. Carnival stock, for example, stalled out earlier in November — unlike the other travel names — and is still far short of where it peaked back during the initial June reopening rally.
It’s not hard to see what’s gone wrong for the cruise stocks. Just as soon as they tried to get trips going again, the virus reappeared on board, interrupting a voyage which was supposed to demonstrate improved safety precautions for the industry.
Serious Cruising Safety Concerns
The U.S. Centers for Disease Control and Prevention (CDC) had removed its ban on cruises at the end of October. With that recent decision, it seemed like Carnival and the other cruise lines could finally get back to generating some meaningful revenues. Particularly ahead of winter and the holidays, it appeared that the popular Caribbean cruises in particular would be able to operate.
Now, however, that comeback is in question. With the virus already springing up on board once again, health authorities are reconsidering their previous outlook for the industry. The CDC elevated cruising to “Level 4: Very High Level of Covid-19.” That’s pretty ominous, and is especially alarming for the older patronage that makes up much of the cruising market. Additionally, the CDC also bluntly suggested that “all people avoid travel on cruise ships.”
With that sort of clear message, it seems like it may be only a matter of time until actual prohibitions on cruises return. At minimum, bookings may decline sharply given that sort of unmistakable warning from the key health agency.
Carnival’s Improving Financial Situation
While cruises getting delayed once again is hardly good news, there’s a silver lining for Carnival stock. That being that its financial position is better than the rival cruise lines. Thus, pushing off a return to profitability will hurt the competition more than it affects Carnival.
The easiest way to see this at Carnival is to look at the company’s bond offerings. Regardless of what the stock market is doing from day-to-day, a company’s credit tends to be more steady. Generally, you have institutions as the primary buyers for corporate debt, and they are more picky in terms of the things they are willing to back.
Carnival’s improving financial outlook can be seen by comparing its various bond offerings. Back in April, Carnival had to pay an exorbitant 12% interest rate on its new bond issuance to get access to much-needed cash. In July, Carnival raised another big chunk of money at a slightly less punitive 11% interest rate.
This past week, Carnival announced another bond offering, which seeks to bring in roughly $2 billion. Analysts see the deal getting done at an 8% interest rate. That’s way better than the levels Carnival raised its debt at earlier this year, and it also beats the 9% range that folks had expected from this latest offering. With demand for this latest offering come in strong, however, Carnival will be able to issue more bonds than initially expected and at a better interest rate as well. That’s good news all around.
Carnival Stock Verdict
This speaks to the broader point: Carnival is no longer at high risk of failure. Now investors are just assessing how long it will take for things to start getting back to normal. The latest spike in virus cases and subsequent CDC warning are a short-term negative. However, the worst case scenarios are off the table thanks to the company’s successful fundraising efforts.
Importantly, Carnival has been much more successful in its efforts than some of the other listed cruise lines. As a result, Carnival should be able to do alright even if cruises are prohibited again in the short-term.
That said, unless you’re looking to take a long-term position in Carnival stock, there’s no rush to buy here. Airlines and other travel stocks are more essential to a degree; there would be more opposition to shutting down aviation again. Cruises, by contrast, are purely discretionary, and thus can easily be idled well into 2021. As such, from a trading perspective, it makes sense to wait on Carnival until the vaccines actually reach mass distribution early next year.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.