The past 12 months haven’t been kind to the Carnival (LSE:CCL) share price. With cruise ships being dubbed ‘floating petri dishes’, the pandemic has almost wiped out the cruise line industry.
Lockdowns and closed borders have led to practically all sector activity ceasing. But now that the vaccine rollout has begun, is the Carnival share price about to explode? And would it be a good buy for my portfolio? Let’s take a look.
What happened to the Carnival share price in 2020?
Early on in the pandemic, Carnival began preparations to protect its passengers’ safety by cancelling all booked trips. With revenue being refunded to customers, the firm needed a financial lifeline, which came in the form of new loans and equity offerings.
While it enabled the business to remain afloat, its financial health weakened significantly. Within a few weeks, the share price tumbled and then fell off a cliff by over 80%!
But over the past few months, the Carnival share price looks like it has begun to recover. The announcement of multiple vaccines in 2020, combined with the subsequent worldwide rollout this year, has pushed the share price up by nearly 50%.
Take a step back to see the bigger picture
The vaccine is undoubtedly fantastic news for the entire travel industry. However, the recent rebound in Carnival’s share price may be unjustified.
Originally, the suspension of cruises was supposed to be lifted in January 2021. That didn’t happen. Instead, the cruise line operator extended the pause on most trips until March. But some for America and Asia will remain suspended until November.
It doesn’t look to me like the business will return to its standard operating capacity until early 2022. And until then, Carnival still needs to pay its bills (maintenance costs, port fees, salaries, debt interest) without a reliable income source.
What’s worse is that due to the protective covenants on the loans taken in 2020, Carnival’s ability to raise capital through additional debt financing is now severely limited.
Carnival share price: is now the time to buy?
While the business’s financial health looks questionable to me, investors might be on course for enormous returns.
The cruise line industry has some of the highest customer loyalty levels of any sector. On average, 85% of passengers book another trip. What’s more, a survey by Cruise Addicts magazine revealed that 88% of readers are not deterred by Covid-19, with more than half already booking another trip since the pandemic began. Carnival’s management has also noted a recent surge in booking activity for 2021. This provides further evidence of customer loyalty and pent-up demand.
The income from these advanced bookings might be sufficient to keep up with interest payments. If so, I believe Carnival’s share price will return to its pre-Covid levels over the long term.
But until these booking figures and the financial results for Q4 2020 are published, it’s impossible to determine whether the business will survive the storm. Therefore, I can’t justify any investment for my portfolio at this point in time.
The post Will the Carnival share price skyrocket in 2021? Here’s what I think appeared first on The Motley Fool UK.
Zaven Boyrazian does not own shares in Carnival. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021