Carnival (NYSE:CCL) stock has struggled even as the novel-coronavirus pandemic winds down. It’s been the same across all of the cruise industry.
Despite impassioned pleading by the companies in the sector and a lawsuit by the state of Florida seeking to end the CDC’s ban on cruises originating from the U.S, the agency has not relented.
But as Carnival and other cruise operators brag about their high booking rates for future cruises, CCL stock and its peers still remain elevated.
I believe that the U.S. ban on cruises could last longer than many believe. I would take the bookings reported by Carnival and its peers with the proverbial grans of salt, and Carnival has a huge debt load that is likely to keep rising for the foreseeable future.
In light of these points, I continue to recommend that investors sell the shares of Carnival and those of its peers.
A Unique Risk and CCL Stock
In recent weeks, the cruise industry has argued that it is being unfairly singled out. Why are movie theaters, restaurants, casinos, museums, and stadiums being allowed to open, while the CDC still refuses to allow us to open, they’re asking.
The answer is simple enough: cruises pose a unique risk even as the pandemic winds down. During traditional cruises, hundreds of people spend multiple days together in close quarters. the same can’t be said for other leisure activities.
From a common-sense standpoint, the virus has a much greater chance of spreading among crowds of people over multiple days than over several hours or even one day.
Last June, Scientific American reported that, “Time matters too. The longer a group stays in contact, the greater the likelihood that the virus will spread among them.”
It’s true that the chances of the virus spreading to dozens of vaccinated people is not very high. Still, the vaccines are not 100% effective, and they are particularly vulnerable to variants of the virus.
With so many people in close quarters on cruises for multiple days, the chances of coronavirus outbreaks, I believe, are way higher than 0% or even 2%.
Finally, once infected cruise participants return to land, the disease could be spread to more people there.
The Difficulty of Quarantining on Ships
Compounding this issue, quarantining is a much more difficult, onerous task on cruises than on land.
It’s not extremely difficult to quarantine oneself in a house or apartment, where nearly everyone has 24/7 access to dozens of TV channels, the internet and a phone. Additionally, most apartments and homes have at least a few rooms and a few hundred square feet of space.
By contrast, on cruises, quarantining involves staying in one tiny room with little or no access to TV, the phone and the internet. One factor behind the CDC’s reluctance to lift the ban on cruises could be that it doesn’t want to see people quarantined on cruises suffer so much.
Additionally, the agency may think that cruise operators could be hesitant to enforce quarantines. Would you want to be the Carnival employee who has to tell a sick 80 year-old woman that she has to stay in a tiny room by herself with little or no diversions for four days?
When the pandemic began, cruise ships filled with people infected with the coronavirus were stuck at sea for many additional days, as states and countries did not want to take in the sick individuals.
Although fears of the virus are much less now than they were then and the disease is much less likely to spread much now thanks to the vaccines, governments may still be reluctant to accept dozens of people who have the virus. Thus, the issue of cruise ships carrying people with the coronavirus is likely to create difficult logistical problems for government agencies, including the CDC, as well as for Carnival and its peers.
Taking Bookings Data With a Grain of Salt
On Carnival’s fourth-quarter earnings conference call, held on Jan. 11, its CEO, Arnold Donald, claimed that, “Bookings for the first half of 2022 are running ahead of 2019 levels,” in the words of Cruise Industry News.
However, after Lordstown Motors (NASDAQ:RIDE) noted that the 100,000 orders it reported receiving for its Endurance electric pickup truck were “nonbinding,” and short-selling firm Hindenburg claimed that a high number of the reservations are “fictitious,” (which Lordstown denies) I’m more skeptical about companies’ reports of orders, bookings and reservations.
For its part, Carnival is tremendously incentivized to report bookings totals that are as high as possible. One reason for that is the company’s potential need to sell additional shares of CCL stock to avoid bankruptcy.
If investors are convinced that the company’s bookings are strong, they are more likely to pay higher prices for Carnival’s shares. Moreover, people tend to follow the lead of others. If consumers believe that Carnival’s bookings are high, they are more likely to book cruises with the company themselves.
I suggest that investors take Carnival’s bookings with a grain of salt
Debt and the Bottom Line on CCL Stock
As of the end of Q4, Carnival had massive net debt of nearly $21 billion, representing about 100% of its 2019 revenue. The company’s enterprise value has reached a staggering $53.4 billion, yet no one knows when it will be able to start sailing from the U.S. again.
Given the risks and logistical issues involved with resuming cruises, Carnival may not be able to resume launching long cruises from America for many months.
Meanwhile, I would not be surprised if the demand for cruises is actually much lower than many expect.
Finally, a negative incident related to the coronavirus on any cruise ship could send Carnival’s business and CCL stock tumbling even after the company is allowed to resume sailing from U.S. ports.
On the date of publication, Larry Ramer held a short position in RIDE.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
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