Shares of the world’s largest cruise company, Carnival Corporation & plc (CCL)—which has a fleet of 87 ships that visit more than  700 ports around the world—have advanced  8.8% over the past three months to close Friday’s trading session at $28.13. This is due primarily to investors’ optimism surrounding the company’s plans to resume its guest cruise operations in a phased manner in the United States, the Caribbean and Europe. However, it’s expected to take a long time before the company can operate at  full capacity.

Miami-based CCL said it expects to have its full fleet back in operation by spring 2022. It added that its phased resumption of guest cruise operations is expected to continue to have a material impact on all aspects of its business, including liquidity, financial position and operational results. However, it is expected it will take time for CCL to pay off massive debts accumulated amid the COVID-19 pandemic. So, we think its near-term prospects look bleak.

Furthermore, on June 18 CCL said it had detected unauthorized access to its computer systems in March, affecting the personal information of some guests, employees and crew for Carnival Cruise Line, Holland America Line, Princess Cruises and medical operations. So, here are the factors that I think could shape CCL’s performance in the coming months:

COVID-19 Situation Not Yet Under Full Control

While some of the major economies have been gradually recovering from the pandemic on the back of rapid vaccinations, unvaccinated people and  emerging COVID-19 variants could precipitate another surge in cases. According to The BMJ,  delta variant cases of COVID-19 in the UK have risen 79%.

CCL and the Royal Caribbean Group (RCL) said that they will push ahead with a return to cruises this summer despite two guests onboard a test run for RCL’s Celebrity Millennium ship testing  positive for COVID-19, according to a Reuters report. Furthermore, the U.S. Centers for Disease Control and Prevention said it was not possible for cruising to be a zero-risk activity and that it will always pose some risk of transmission. This could serve as a blow to people’s confidence in returning to traveling by cruises, thus potentially affecting CCL significantly in a negative way.

Lofty Valuation

In terms of forward EV/S, CCL’s 28.02x is 1,640.4% higher than the 1.61x industry average. The stock’s 17.06 forward P/S is 1,163.7% higher than the 1.35x industry average.

Unfavorable Analyst Estimates

Analysts expect CCL’s annual revenue to decrease 35% year-over-year to $3.64 billion in its fiscal year 2021. The company’s EPS is expected to remain negative for the current quarter, ending August 31, 2021, and in  2021. Its EPS is also expected to decline at a 115.6% rate  per annum over the next five years.

CCL’s management said on June 24 that the company is expected to incur net loss on both a GAAP and adjusted basis for the third quarter of 2021 and full year, ending November 30, 2021.

POWR Ratings Reflect Bleak Prospects

CCL has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on different categories. CCL has an F grade for Value, which is in sync with its significantly higher-than-industry valuation ratios. It has an F grade for Stability, consistent with its beta of 2.34.

The stock also has an F grade for Quality. This is justified given its 212.15% negative value for its trailing-12-month gross profit margin, compared to the 34.57% industry average. CCL also has negative values for its trailing-12-month ROCE and ROTA compared to the respective 11.87% and 3.84% industry averages.

CCL is ranked #3 of 4 stocks in the F-rated Travel – Cruises industry. To see CCL’s ratings for Growth, Sentiment, and Momentum as well, click here.

Bottom Line

CCL’s full fleet is not expected to be back in operation until spring 2022. This could be further delayed if the COVID-19 crisis  gets worse. Analysts expect CCL’s  revenue to decline in its fiscal year 2021 and its EPS to remain negative. Amid this backdrop, the stock looks significantly overvalued. So, we think it’s wise to avoid the stock now.

CCL shares fell $0.64 (-2.28%) in premarket trading Monday. Year-to-date, CCL has gained 27.79%, versus a 15.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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