October 1, 2022

Y M L P-260

Business the wise choice

CCL Stock Continues to Sink After an Analyst Downgrade

  • Argus Research downgraded Carnival (CCL) from a “buy” to a “hold.” 
  • Investors who are convinced the worst is behind the cruise ship operator might be off base.
  • Wait to see what happens with Covid-19 over the next seven to 14 days.

Carnival (NYSE:CCL) got a smackdown on March 25 when Argus Research analyst John Staszak downgraded CCL stock from a “buy” to a “hold.” The analyst believes high fuel prices and a stubborn omicron variant suggest now is not the time to buy shares in the world’s largest cruise ship operator.

There are a couple other issues hanging over Carnival’s head that Staszak didn’t mention. At the moment, those who bought last July in the low $30s have got to be wondering if CCL stock can return to those prices. 

Ultimately, it’s up to omicron to decide if Carnival is ready to resume 100% of its operations. However, surging cases suggest investors should hold off on CCL stock. 

CCL Stock and Its Business Update

There is no question the best part of Carnival’s recent business update was the fact that “75% of the company’s capacity had resumed guest cruise operations.”

Another big positive was a 7.5% increase in revenue per passenger cruise day (PCD) from 2019 levels. It now expects the entire fleet to be back in business for the summer, its busiest time of year. 

In conjunction with this, Carnival expects to start making money on a monthly adjusted EBITDA basis. 

According to the company, its available lower berth days (ALBDs) continue to gain momentum. In Q4 2021, they were 47% of its total fleet capacity. In Q1 2022, they’re up to 60%. In addition, occupancy in the first quarter was 54%, a 20% increase from Q4.

Things are moving in the right direction, but it’s too soon to know if the BA.2 omicron subvariant will be a problem. We know it causes 33% of all U.S. Covid-19 cases. In places like New York and New Jersey, it accounts for more than half of infections.

Dr. Anthony Fauci believes the variant won’t be a problem — but if that isn’t the case, we should see a surge in cases now (approximately three weeks after cases surged in the United Kingdom.) Most experts, however, believe the subvariant isn’t going to shut down business operations.

The 1 Thing CCL Owners Shouldn’t Worry About

In addition to Covid, Staszak downgraded CCL stock because of high fuel costs. I’m not so sure it’s as big a problem as he thinks.

In the first quarter, Carnival’s ships consumed 566,000 metric tons of fuel at $648 per metric ton. That’s 65% higher than a year earlier. For the final three quarters of fiscal 2022, it expects to consume 2.2 million metric tons of fuel. 

So, based on 2.77 million metric tons consumed for all of 2022 at $795 per metric ton, Carnival will spend $2.2 billion this year on fuel. That’s a lot of money — about 1.5x its interest cost for 2022.

However, let’s compare fuel costs from earlier times. Between September 2013 and June 2014, oil prices rose above $100. That was the last time they did until 2022.

How Historic Fuel Costs Stack Up

Going back in time, Carnival’s 2014 10-K provided its fuel consumption and cost for 2012 through 2014. Interestingly, 2012’s fuel cost per metric ton was higher at $710, not too far off 2022’s estimate. It was also the highest consumption at 3.4 million metric tons, 21% higher than in 2022. So, Carnival spent $2.38 billion on fuel in 2012.

Also in 2012, it had ALBDs of 71.98 million. That’s $33.09 per ALBD. In 2022, its projected ALBD is 73.7 million, or $29.88 per ALBD.

So, even though it has more capacity today than it did in 2012 and fuel prices are higher, Carnival’s cost per ALBD and passengers carried will be lower. You can chalk that up to more fuel-efficient ships. 

Fuel is part of the business. This cost ebbs and flows. It should not be construed as a major problem.

Why Wait to Buy CCL Stock?

There are two ways to answer this question.

First, if you are supremely confident Carnival’s share price is worth more than $18 per share, buy at this price. If a correction happens due to Covid, buy more at $15 or lower. In the long term, you’ll win.

However, if you’re not sure about the consequences of the BA.2 variant, the wise approach is to wait for more information. CCL stock has traded above $50 on three occasions since 1999. A worst-case scenario sees you buying in the $20s when the information becomes more apparent.

If you’re not an aggressive investor, waiting is the best course of action.    

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.