by Ian Harvey
March 15, 2020
Shares of Carnival have plummeted 64.9% in the past month. CCL has not only suspended cruise operations from Chinese ports but also cancelled voyages to other parts of Asia.
Cancellations are impacting the booking trends, which in turn will also impact 2020 financial results.
But Members of Stock Options Made Easy “Mentorship Program” have made 429% potential profit using a PUT OPTION.
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The global stock markets have been rattled by the coronavirus crisis and the cruise stocks have been no exception to the trend. Travel warnings and cruise cancellations are starting to take a toll on the industry.
While cruise business from China and Asia fell significantly, bookings for the broader business outside Asia has also softened recently thanks to travel restrictions to contain the spread of the contagion.
Carnival Corp, as mentioned previously, has not only suspended cruise operations from Chinese ports but also cancelled voyages to other parts of Asia; halting cruises on 18 Princess Cruise’s ships for 60 days, which will impact trips scheduled from March 2 to May 10.
The Princess Cruises unit has been in the spotlight after its Diamond Princess and Grand Princess ships were quarantined after they became hotbeds for coronavirus infections.
Also, Carnival Cruise Line announced Friday that it is pausing operations immediately across its fleet of ships based in North America and will resume them on Friday, April 10. All ships currently at sea will continue their voyages and return to their homeports as scheduled.
The Trade at the Time.....February 28, 2020.....we wrote.....
“Carnival Corp. (NYSE:CCL), the largest publicly traded cruise company in the world with approximately 50% of the total market share for the cruise industry, has dropped 36.21% since the end of January, when news of the virus began spreading like wildfire.
That drop has capped off a tough year for shareholders, with the share price down 45% in that time. The share price as of market close yesterday was $31.85.
This is the lowest stock price for Carnival since October 2013.
On Feb. 3, the Diamond Princess cruise ship docked at Yokohama, Japan. Due to a coronavirus outbreak on the ship, the passengers were trapped aboard for the next two weeks, bored and rarely allowed to see sunlight as they were quarantined on the so-called "ship of doom."
The quarantine of Carnival Corp.'s Diamond Princess – which was denied off-boarding access at multiple Asian ports before those affected by coronavirus were allowed to be flown to the U.S. for treatment – added to concerns over the effect the outbreak will have on the cruise industry, his note stated.
The cruise industry faces a unique and serious problem from the epidemic: the fear of entrapment. While it's nearly impossible to quarantine everyone in a city during a virus outbreak, quarantining a ship requires a simple refusal to allow its passengers to step on land. To many potential passengers, the prospect of being trapped in a "petri dish" is a definite trip-canceller, while others may fear quarantine even more than the disease itself.
Since the beginning of the outbreak, Carnival has been forced to suspend all cruise operations leaving from ports in China and a significant portion of cruises leaving from other parts of Asia. If there is an outbreak of the virus on one of its ships, it will also need to compensate guests for the negative experience.
"While not currently planned, if the company had to suspend all of its operations in Asia through the end of April, this would impact its fiscal 2020 financial performance by 55 cents to 65 cents per share, which includes guest compensation," said a company representative in a statement."
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The rapidly deteriorating situation in an industry strapped with fixed costs poses a major test of the financial strength of the cruise company and could lead to a cash crunch and, by extension, dividend cuts.
“It’s dire in the near term,” says Harry Curtis, an Instinet analyst who has covered the cruise industry for many years. “Whether it’s dire in the intermediate term depends on the duration of the coronavirus.” If the virus is brought under control here by the late spring or early summer, he says, “the issue at least becomes more manageable” for the cruise line.
And, earnings estimates for Carnival have eroded considerably already. Analysts expect Carnival to earn $3.22 a share for its fiscal year ending in November, down from a $5.11 estimate a year ago.
This estimate will likely fall further; the question is by how much. That uncertainty is a major reason why the stock has sold off by 70% or more since Jan. 20, when the first reported coronavirus cases outside of China occurred. However long it takes to navigate through the immediate crisis, it’s probable that the stocks will be depressed for a long time, and that the cruise line’s liquidity, or available cash, will be tested.
This appears to be a very upsetting scenario for investors, but Carnival appears to have the financial wherewithal to ride out at least a few horrible quarters at least.
Deutsche Bank Securities analysts, in a research note March 10, observed that the cruise lines have ample liquidity, though leverage ratios could spike. The higher the ratio goes, the less cash flow a company has to cover its debt service.
The Deutsche Bank analysts ran scenarios in which the cruise operators generate various levels of earnings before interest, taxes, depreciation, and amortization, or Ebitda, depending on the business climate. Ebitda is a proxy for operating cash flow.
At the end of 2019, Carnival, the largest cruise operator as measured by sales, sported the lowest leverage ratio at 2. A 20% decline in Ebitda would push that to 3—not good, but not horrendous. Still, there are questions about whether Carnival can sustain its dividend, even though it had the strongest balance sheet of the three cruise companies heading into 2020. In a March 5 note, Curtis of Instinet wrote that the “company’s balance sheet does not make the stock relatively safe” amid the coronavirus uncertainty and that the dividend is at risk.
At that time, he figured that the company would have to spend $12 billion on capital expenditures (mainly new ships and upgrades) and $2.8 billion on dividends over the next two years—exceeding cash flow by about $3 billion. The company, he wrote, “has a conservative board, which faces maintaining the dividend in the face of rapidly rising leverage.”
Will this sink Carnival stock completely? UBS analyst Robin Farley, however, notes that the downturn doesn’t necessarily equate to cash depletion for Carnival and its peers. These companies, she says, are offering incentives on cancellations to take a future cruise credit worth a 25% higher amount for two years, with an option to get the original amount of cash back after two years if the credit isn’t used.
As a result, she expects “many passengers would let their deposit ride.”
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