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Remain Calm and Gradually Add to Your Position in Carnival

Few investors and commentators, if any at all, predicted that 2020’s first half would be as bad as it was for cruise-line operator Carnival (NYSE:CCL). The decline in the CCL stock price was steep enough to scare many investors out of the travel industry altogether.

Carnival is the largest cruise-line operator in the world, so it’s sometimes viewed as a bellwether for the industry as a whole. Even if you’re not eager to invest in CCL stock in particular, it’s not a bad idea to keep an eye on the company’s progress.

But don’t expect the progress to be quick or easy. It will take time for the public to feel comfortable traveling on cruise ships again. Still, the market conditions will improve eventually, and patient CCL shareholders will be rewarded in due time.

A Closer Look at CCL Stock

The medium-term decline in CCL stock actually didn’t start with the onset of the novel coronavirus. It goes back further than that, having commenced in January of 2018. At that time, the share price was around $71.

From there, CCL stock began to gradually stairstep its way down to the $52 level by January of 2020. Even with that decline, however, the technical outlook for Carnival didn’t look too bad overall.

Then the coronavirus wreaked havoc on the economy and no-sail orders made it impossible for cruise lines to generate revenue. After a sharp and frightening drop, CCL stock finally bottomed out in April at the 52-week low of $7.80.

The bulls have regained control of the price action, but the stock’s ascent has been gradual and unsteady. There have been disappointing days in which the overall stock market rallied but cruise-line stocks faltered. Carnival shareholders will need to be patient and stay the course if they’re going to capitalize on this long-term contrarian opportunity.

A Time of Uncertainty

If there’s one thing that investors can’t stand, it’s uncertainty. Unfortunately, Carnival’s recently reported second-quarter data and commentary suggest that uncertainty may persist for a while.

The highlights of the quarterly data indicate financial struggle for Carnival during the pandemic:

  • U.S. GAAP net loss of $4.4 billion
  • Adjusted net loss of $2.4 billion
  • $700 million in revenues, which is much lower than the $4.8 billion generated during the comparable quarter of the prior year
  • No earnings forecast
  • A “pause in guest operations” that’s “continuing to have material negative impacts on all aspects of the company’s business”
  • Expectation of “a net loss on both a U.S. GAAP and adjusted basis for the second half of 2020”

Out of all that, the lack of an earnings forecast might actually be the worst part. Again, it’s the uncertainty that bothers market participants the most. They want guidance, and they’re not getting it here.

Preparing for Better Times

Even with all of that unfavorable data and uncertainty, there’s reason to remain hopeful. For one thing, Carnival did actually finish the second quarter with $7.6 billion of available liquidity.

Plus, the company finished the second quarter with $2.9 billion in total customer deposits. That includes $475 million in deposits for cruises scheduled to take place in the second half of this year. So, despite the pandemic, there are customers who are willing and able to spend money on cruises.

It will take some time, but cruise-line activity will eventually pick up. In the meantime, Carnival is taking steps to reduce its capital outflow:

  • A significant reduction in marketing and selling expenses
  • A reduction in ship-operating expenses, including those related to fuel, food, crew payroll, insurance and port charges
  • An across-the-board hiring freeze
  • Furloughs, layoffs, reduced work weeks, as well as salary and benefit reductions

These steps will have an unfortunate impact on the affected workers, but they’re probably necessary measures to ensure the continued viability of the company as it navigates the worst economic crisis since the Great Recession.

The Bottom Line

It’s not realistic to expect everything to return to normal for Carnival in the near term. Nonetheless, CCL stock deserves consideration as a worthy buy-and-hold for patient investors with a contrarian strategy.

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