CCL stock will benefit from positive cash flow guidance for 2022.
With optimism on economic recovery and return to cruising, Carnival stock touched highs of $31.50 in June. However, subsequent concerns related to the delta variant was a catalyst for correction. The cruise line’s stock currently trades at $26.
The company recently announced results for the third quarter of 2021. With several positives, CCL stock seems positioned for another rally.
Let’s talk about the factors that make the stock attractive.
First and foremost, a recent research model indicates that U.S. islikely to see a brighter fall and winterwith decline in Covid-19 cases. If this holds true, the cruising industry is likely to gain growth traction in the holiday season.
According to data from COVAX,80% of the eligible populationhave received at least one dose of the vaccine in high- and upper-middle-income countries. This is the key market for cruising and the vaccine data seems encouraging in terms of the outlook for 2022 and beyond.
Carnival is on track torestart 50% of its fleet capacity by October. The company expects to ramp up capacity to 65% at the beginning of the new year. This is good news from the perspective of capacity utilization. There is significant pent-up demand for cruising and Carnival seems well positioned to benefit.
Q3 Results Driven Rally
With cash burn, balance sheet health is an important consideration. The good news is that Carnival has a total liquidity buffer of $7.8 billion. This is likely to be sufficient to return to full cruise operations.
For the last quarter, the monthly cash burn rate was $510 million. For the third quarter, the company’s voyages were cash flow positive. As more fleet return to operations, cash burn is likely to decline meaningfully.
On the flip side, Carnival has a debt burden of over $30 billion. Debt servicing cost is likely to remain high in the coming years.
At the same time, the company’s operating cash flows have been robust prior to the Covid-19 crisis. Carnival is likely to pursue balance sheet repair once the fleet returns to operations. By June 2022, Carnival is estimating return to 75% capacity.
It’s also worth noting that in its fiscal third quarter, Carnival extended the maturity profile for $4 billion in debt. At the same time, the company reduced debt servicing cost by $250 million.
Another major positive is the company’s booking positions for 2022. According to the company’s report, the “booked position for thesecond half of 2022 is at a new historical high.” As of May, Carnival had reported total customer deposits of $2.5 billion. Deposits have increased by $630 million to $3.1 billion as of August.
The Bottom Line for CCL Stock
Carnival seems to have a bright outlook in terms of recovery in the coming quarters. In the last six months, CCL stock has been sideways. With the recent results and the booking outlook, a breakout on the upside seems likely.
In terms of risks, the balance sheet is likely to remain a concern. Prior to the Covid-19 crisis, Carnival reported operating cash flow in excess of $5 billion. Therefore, the business has the potential to deliver robust free cash flow. In the coming years, this potential cash will be utilized for deleveraging.
Management has guided for positive operating cash flows in 2022. Further, there is an initialguidance for higher EBITDA in 2023as compared to 2019. Overall, even with a relatively stressed balance sheet, CCL stock looks positioned for upside as the markets focus on return to positive cash flows.
Additionally, the company opened bookings for 2023 with “with unprecedented early demand.” In the near term, customer advances and the visibility for higher capacity utilization, is likely to ensure smooth debt servicing.