Carnival Stock Up 7% Today – Time to Buy CCL Stock?

The price of Carnival stock is going up nearly 7% in pre-market stock trading action this morning as oil prices appear to be taking a breather after a sharp 7-day run-up.

Futures of the West Texas Intermediate (WTI) are retreating 3% this morning at $119.9 per barrel while Brent futures are down 2.8% as well at $124.3 per share as market participants keep digesting the latest developments concerning the armed conflict between Russia and Ukraine.

News sources have been reporting that Russia has agreed to temporary ceasefires and evacuation corridors to be used for civilians to escape from the most hard-hit cities within the country.

The fact that Russia is making concessions might be interpreted as a sign that President Vladimir Putin is taking a less radical approach so Russia can somehow participate again in the global energy markets.

President Joe Biden’s decision to ban all imports of oil, natural gas, and coal from Russia to the United States has triggered the latest rally in crude prices and this has sent shockwaves to the entire market as the financial performance of many companies – including cruise operators – is severely affected if the price of this commodity increases.

Carnival’s finances have already been battered by COVID-19 and this new energy crisis could be pressuring investors to “jump off the ship” as the company’s recovery could be delayed or severely hurt if an all-out war breaks out in Europe.

What could be expected from this cruise line stock in the current environment? In this article, I’ll be assessing the price action and fundamentals of Carnival stock to outline plausible scenarios for the future.

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Carnival Stock – Technical Analysis

Carnival stock is down 21% so far this year while shares are trading nearly 70% below their pre-pandemic high of $52 per share as the company’s financial situation was radically changed during the health crisis.

Back on 15 February, the United States Centers for Disease Control and Prevention (CDC) eased its restrictions for cruise ships as the number of virus cases in the North American country continues to decline.

According to the latest data from the health agency, a total of 54 cruise ships have not reported a COVID infection during their most recent journey while another 41 have reported a number of cases that is below the minimum threshold for the CDC to intervene.

These two groups account for 84% of the total number of cruise ships that are currently participating in the CDC’s COVID-19 prevention program designed specifically for the industry.

Even though the COVID headwind might already be fading, higher oil prices are now the main negative catalyst for stocks within this sector. Cruises mostly operate on diesel engines and gas turbines, which means that operating costs would rise if the price of any of these two commodities increases.

As indicated in the chart above, the price of CCL stock has broken below its December lows and that reinforces a short-term bearish outlook for the stock. Meanwhile, the stock rejected a move above the 200-day simple moving average two times in February. This led to a sustained decline that was aided by the broad-market turmoil caused by the Russia-Ukraine war.

Momentum indicators are favoring a bearish outlook as well as the Relative Strength Index (RSI) has declined to oversold levels for the first time since December. This could indicate a potential trend reversal.

Meanwhile, the MACD has also moved to negative territory and below the signal line while this move is being accompanied by steadily increasing negative histogram readings.

Even though today’s uptick seems encouraging, the technical readings are all pointing to a bearish outlook unless energy prices decline significantly in the following days or weeks.

Carnival Stock – Fundamental Analysis

On 15 February, Carnival reported its financial results covering the entire 2021 fiscal year, which ended on 30 November

Revenues ended the year at $1.9 billion compared to $5.6 billion the firm reported in 2020 and $20.8 billion it brought in 2019 – before the pandemic started. Meanwhile, operating losses landed at $7 billion compared to $8.9 billion the company shed in 2020.

Net losses for the year stood at $9.5 billion or $700 million lower than the $10.2 billion reported the previous year. Meanwhile, Carnival burned around $7.7 billion in cash and reported total cash and equivalents of $9.14 billion.

The firm’s long-term debt climbed to $28.5 billion with only $1.84 billion in principal maturing in 2022 and another $2.7 billion in 2023. Since the bulk of the company’s debt will mature in 2024 and beyond, solvency risks at the moment are not high unless the firm’s cash burn accelerates again in 2022.

This is perhaps the riskiest situation for Carnival considering the current state of the world as a large-scale armed conflict in Europe or even worldwide could disrupt the firm’s operations severely and may lead to a situation of insolvency in the next 12 to 18 months.

On the other hand, the baseline scenario for the markets is that Carnival will jump back to profitability in 2023. The consensus estimate for the firm’s adjusted earnings per share for that year stands at $1.84 per share resulting in a forward P/E ratio of 8.6x.

However, with oil prices at these levels, these estimates have probably been revised downward already and that is one of the reasons why Carnival stock has gone down. Considering the significant degree of uncertainty that the markets are experiencing right now amid the potential ripple effects that the war could have on the global economy, the valuation at this point seems fair for a company in such a dire situation.

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