Carnival: Dire Early Results, Fair Value Remains

With no-moat Carnival’s CCL fleet out of commission for roughly 10 of the 12 weeks in its second quarter, we expected the firm to print an operating loss. While the adjusted earnings per share loss of $3.30 was larger than the nearly $1.00 loss we had modeled, sales of $0.7 billion (marking an 85% year-over-year decline) were a bit better than our expectation. However, press release language that Carnival expects “substantially all of its ships to reach their full pause status during the third quarter” indicates the important third quarter is unlikely to see a resumption in cruise travel, potentially extending Carnival’s pause beyond the Aug. 1 anticipated sail date (Norwegian recently postponed sailings until Oct. 1, 2020). With guidance for further losses in its second half (already included in our forecast), a turnaround in cruising is unlikely to take hold until 2021, and even then could look different than in the past (lower occupancy at first, shorter itineraries).

We don’t plan any material change to our $20 fair value estimate, as our outlook had called for a slow resumption in cruising, with net yields not returning to the 2019 level until 2025 and passenger capacity not surpassing 2019’s level until 2028. With the sale of six ships underway over the next 90 days (with further hardware in discussion for sale), and delays on new hardware stemming from shipyard closures, total capacity for Carnival should be materially resized over the next year, limiting available passenger cruise days. We still assume that once the disruption of COVID-19 passes, Carnival could generate about 2% yield growth on average and control costs to just above 1%, which could ultimately lead the firm back to high-20% EBITDA margins.

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