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Down 62% in this bear market, can Carnival stocks rebound in 2023?

What happened

Actions from carnival (CCL 2.94%) have fallen over the past year largely due to a combination of slow recovery from the pandemic, heavy losses, high debt and macroeconomic headwinds.

According to S&P Global Market Intelligence, the stock has fallen 62% since S&P 500 peaked on January 3, 2022. As the chart below illustrates, the stock fell sharply last spring and has remained down ever since.

^SPKS chart

^SPKS data according to ICharts.

Could cruise operator stocks bounce back in 2023?

So what

All cruises were put on hold in the early stages of the pandemic, and while those ships have now resumed sailing, operators, including Carnival, the world’s largest cruise operator, have struggled to recover from their extended layoffs.

In its fiscal fourth quarter earnings report, released in December, Carnival reported positive trends in occupancy and bookings, but still had a GAAP net loss of $1.6 billion, or $1.1 billion on a customized basis. It also reported negative free cash flow of $1.3 billion for the period ended Nov. 30.

While the company achieved an 85% load factor in the fiscal fourth quarter and revenue per cruise passenger day was above 2019 levels, the big loss reflects that the company is struggling with higher costs, including higher fuel costs.

Management said price trends have been favorable since 2023 and that its advanced booking position – bookings for future cruises – is at a higher level than its historical average, and at average prices higher than before the pandemic.

However, the company still faces a significant challenge due to its debt burden, which now stands at $34 billion. The company spent $448 million to cover interest expenses in the fiscal quarter. That’s an annual rate of $1.8 billion. Even if the company reached its pre-pandemic peak in operating income, those interest costs would wipe out half of its profits.

Finally, given the rapid rise in interest rates over the past year, the company’s interest payments are likely to increase as it rolls over its debt and is forced to refinance it at higher rates.

Now what

Compared to historical levels, Carnival shares look cheap, but the prospect of a recession seems to be weighing on cruise stocks right now. While its ship occupancy should eventually return to pre-pandemic levels, the increased debt burden will weigh on inventories.

Given the negative market sentiment and forecasts of a recession this year, this action is unlikely to reverse until investors believe the worst of a potential economic downturn is over.

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