Carnival Corporation (NYSE: CCL) - transnational cruise company, one of the largest in the world. Founded in 1972 and started out traveling from Miami to San Juan.
The company has 58 thousand employees and 20 affiliated cruise brands, whose total fleet consists of 91 courts. Carnival is the only corporation in the cruise sector, included in two indexes at once: American S&P 500 and British FTSE 100.
About company
The company distinguishes the following main revenue segments:
- Passenger tickets. Revenue from cruise ship tickets and transfers. Company 11 various cruise destinations. Ticket prices also include accommodation., wide variety of dishes and daily entertainment. The share of this segment according to the results 9 months of 2021 amounted to 52%.
- Activities and amenities on board. Night clubs, salons, bars, theatrical performances, films, swimming pools, libraries, health clubs and various sports. The share of this segment according to the results 9 months of 2021 amounted to 48%.
Revenue structure by areas, million dollars
| 9м2021 | share | |
|---|---|---|
| Passenger tickets | 326 | 52% |
| Services on board and more | 295 | 48% |
| Total | 621 | 100% |
Revenue structure by regions, million dollars
| 9м2021 | share | |
|---|---|---|
| North America and Australia | 291 | 47% |
| Europe and Asia | 274 | 44% |
| Cruise support | 15 | 2% |
| Other tours | 42 | 7% |
| Total | 621 | 100% |
Financial indicators
22 September Carnival published financial statements for 9 months of 2021.
The company's revenue fell by almost 9 times from $5.5 billion to $621 million compared to the same period last year. COVID-19 pandemic and cruise travel restrictions continue to put pressure on company performance.
As of 31 August 2021, eight of the company's nine brands have resumed cruising as part of a gradual return to service, wherein 35% capacities work with guests on board. Operating costs and expenses decreased by 54.3% from $12.7 billion to $5.8 billion compared to the same period last year. Net loss decreased by 14% from 8 billion to 6.8 billion. The company's operating margin and free cash flow remain negative.
The company conducted an assessment of financial stability. Consider the impact of COVID-19, cash and short-term investments of the company of $7.8 billion at the end of the third quarter of 2021 - and concluded, that the company has sufficient liquidity to meet its obligations, at least for the next 12 Months.
Projected, Carnival expects fourth quarter and full year net loss. The company is taking steps to improve liquidity, including the completion of capital market transactions, cost reduction, speeding up the withdrawal of some ships from your fleet. The company also reported, that are waiting for the resumption of work 50 ships by the end of 2021 and 71 ships by June 2022.
Financial performance of the company, million dollars
| Revenue | Operating profit | Operating margin | Net profit | FCF | |
|---|---|---|---|---|---|
| 2016 | 16,389 | 3,071 | 18,74% | 2,779 | 2,072 |
| 2017 | 17,510 | 2,809 | 16,04% | 2,606 | 2,378 |
| 2018 | 18,881 | 3,325 | 17,61% | 3,152 | 1,800 |
| 2019 | 20,825 | 3,276 | 15,73% | 2,990 | 46 |
| 2020 | 5,595 | −8,865 | −158,45% | −10,236 | −9,921 |
| 9м2021 | 0,620 | −5,196 | −838,06% | −6,881 | −1,842 |
Balance sheet and leverage
The value of assets has remained virtually unchanged since the beginning of this year and amounted to $53.5 billion. Capital has decreased since the beginning of the year by 27,6% up to 14.8 billion, which is associated with a decrease in retained earnings from 16.07 to 9.19 billion dollars. Total debt has increased since the beginning of the year by 19,9% up to 31.9 billion. The company increased its long-term debt from 23.4 to 28.1 billion. Net debt increased by 43.8% YtD to 24.6 billion due to an increase in total debt and a reduction in cash and cash equivalents from 9,5 up to 7.1 billion.
Most of the company's debt payments are due in 2021-2023 and after 2025. 49% debt has a fixed rate, and 20% - floating. It is also worth noting, what, in addition to the increase in debt burden, the company is actively using the additional issue of shares. So, 1.086 million shares outstanding at the beginning of 2021, in August this figure was 1.131 million shares.
Balance sheet and debt load of the company, million dollars
| Assets | Capital | Total debt | net debt | |
|---|---|---|---|---|
| 2016 | 38,936 | 22,597 | 8,814 | 8,211 |
| 2017 | 40,778 | 24,216 | 7,478 | 7,083 |
| 2018 | 42,401 | 24,443 | 8,745 | 7,763 |
| 2019 | 45,058 | 25,365 | 9,906 | 9,388 |
| 2020 | 53,593 | 20,555 | 26,638 | 17,125 |
| 9м2021 | 53,514 | 14,863 | 31,964 | 24,635 |
Market
Carnival remained the main players in the cruise industry in 2021, Royal Caribbean, Norwegian Cruise. Carnival has been a market share leader for many years.
Carnival was among the companies, who were the first to feel the impact of the COVID-19 pandemic. At the very beginning of the spread of coronavirus, the world media widely covered the situation on the Diamond Princess cruise ship., owned by Carnival.
The company is in litigation, related to another liner Grand Princess, Where was the coronavirus found?: plaintiffs demand millions in damages from Carnival. This, in its turn, undermines the safety of all cruise travel, and damages the reputation of Carnival brands.
Cruise revenue was $3.3 billion in 2020, drop compared to 2019 was 87,78%. The COVID-19 pandemic has hit international travel and the cruise industry the most. Most analysts believe, that international tourism will not fully recover until 2023.
According to cruise lines, a significant recovery should be expected as early as 2022. As of early August, Viking Cruises bookings for 2022 were at 42% more, than at the same time in 2019. Royal Caribbean, Carnival and Norwegian Cruise Line also announced, that demand for 2022 is up compared to 2019 – even with higher prices.
Main countries of receipt of revenue - USA, Germany, England, China, Italy. AND, actually, the situation in the cruise industry will depend on the recovery of the economies of these countries.
High vaccination rates in countries, where is the main demand for cruise services, give reason to believe, that in 2022 we should expect a significant recovery of the market, provided there are no new strains of the virus or an increase in the number of diseases.
Comparison with analogues
As a comparison, the previously mentioned Royal Caribbean and Norwegian Cruise were selected from analogues.. The data was used before the crisis year 2020.
The revenue growth rate will show, how successful the company was in its market, whether the company's services were in demand. Return on equity ratio (ROE) shows the financial return on the use of the company's capital, allows you to assess the quality of work of financial managers.
Norwegian Cruise posted the best revenue growth, Royal Caribbean has a higher average ROE, and Carnival looked balanced and not much inferior to the leaders.
Considering, that this is past data and the situation in the cruise industry is now in crisis, you should not expect high efficiency in the short and medium term from Carnival.
ROE indicators
| 2015 | 2016 | 2017 | 2018 | 2019 | Middle | |
|---|---|---|---|---|---|---|
| Carnival | 7,42 | 12,23 | 11,09 | 12,94 | 12,08 | 11,152 |
| Royal Caribbean | 8,17 | 15,12 | 16,22 | 16,51 | 16,01 | 14,406 |
| Norwegian Cruise | 14,45 | 14,77 | 14,54 | 16,26 | 14,95 | 14,994 |
Revenue Growth Rate
| 2015 | 2019 | Revenue growth rate | |
|---|---|---|---|
| Carnival | 15,714 | 20,825 | 5,79 |
| Royal Caribbean | 8,299 | 10,950 | 5,70 |
| Norwegian Cruise | 4,345 | 6,462 | 8,26 |
Bankruptcy prediction
Given the difficult situation in the cruise travel market, it is advisable to know the financial position of the company in terms of the probability of bankruptcy. For the analysis we use the following indicators:
Quick liquidity ratio — the ratio of highly liquid current assets to short-term liabilities. If the index is more 1, then at the expense of available funds it is possible to cover all current debt, while some of them will still remain at the disposal of the enterprise. If the index is less 1, then highly liquid assets are not enough to fully repay current debts in a short time. The normal value of the coefficient is not less than 1.
Current liquidity ratio characterizes the solvency of the organization, ability to pay current liabilities. Gives an overall assessment of the liquidity of assets, showing, how many dollars of the company's current assets account for one dollar of current liabilities. The higher the value of the current liquidity ratio, the higher the liquidity of the company's assets. normal, and often the value of the coefficient is considered optimal 2 and more.
Absolute liquidity ratio shows the ratio of the organization's most liquid assets - cash and short-term financial investments - to short-term liabilities. Most often, the value is used as a guideline for the normal value of the indicator. 0,2 and more.
Net working capital — the difference between the value of current assets and current liabilities. The higher the value, the more liquid assets, which do not need to be directed to repay borrowed funds.
Total long-term debt to equity ratio shows the level of debt burden as a percentage of equity capital. The lower the value, the lower the debt burden, backed by equity.
Piotroski F-Score - the model was proposed by Stanford University professor D. Piotroski in 2000 to assess the company's financial health. With a value of 8-9, the company can be classified as financially strong. With a value of 0-2, the company can be classified as financially weak.
Altman Z-Score — bankruptcy forecasting model, first introduced by economist Edward Altman in 1968. When the ratio is less than or equal to 1,8, the company is in a disaster area. When the ratio is greater than or equal to 3, the company is located in a safe area. Meaning between 1,8 And 3 indicates an area of uncertainty.
Based on the results of the calculations, we will compile the final score table. Company, which has a better comparison ratio, gets 1 score, the rest - 0. As a result, the leader is Carnival - this company has the lowest risk of bankruptcy.. Royal Caribbean's situation is worst.
Comparison table
| Carnival | Royal Caribbean | Norwegian Cruise | |
|---|---|---|---|
| Quick liquidity ratio | 0,90 | 0,77 | 1,08 |
| Current liquidity ratio | 0,94 | 0,79 | 1,12 |
| Absolute liquidity ratio | 0,82 | 0,63 | 1,26 |
| Net working capital, billion dollars | −26,17 | −88,46 | −35,44 |
| Long-term debt to equity ratio | 180,52 | 307,43 | 411,51 |
| Total debt to equity ratio | 210,14 | 322,22 | 430,37 |
| Piotroski F-Score | 2 | 2 | 1 |
| Altman Z-Score | 0,16 | 0,11 | −0,29 |
Final scoring table
| Carnival | Royal Caribbean | Norwegian Cruise | |
|---|---|---|---|
| Quick liquidity ratio | 0 | 0 | 1 |
| Current liquidity ratio | 0 | 0 | 1 |
| Absolute liquidity ratio | 0 | 0 | 1 |
| Net working capital, billion dollars | 1 | 0 | 0 |
| Long-term debt to equity ratio | 1 | 0 | 0 |
| Total debt to equity ratio | 1 | 0 | 0 |
| Piotroski F-Score | 1 | 1 | 0 |
| Altman Z-Score | 1 | 0 | 0 |
| Total | 5 | 1 | 3 |
Similar bankruptcy prediction metrics are used in banks. Respectively, For the company, whose position is worse, the risk of bankruptcy is still increasing significantly, as it becomes problematic to get a loan on acceptable terms.
It is also worth mentioning, that the most stable companies after overcoming the crisis will have a potential growth driver. In case of bankruptcy of one or more companies, the surviving companies will receive their market share, and in the future, these companies will be able to improve their financial performance faster.
Company multipliers
Most of Carnival's multiples point to undervalued stocks relative to their peers, which allows them to be considered for purchase at current levels.
Company multipliers
| Forward P / E | P / BV | P / S | EV-to-EBITDA | |
|---|---|---|---|---|
| Carnival | 11,65 | 1,67 | 13,07 | −8,88 |
| Royal Caribbean | 190,07 | 3,22 | 35,26 | −14,38 |
| Norwegian Cruise | 31,20 | 2,84 | 47,02 | −11,62 |
| Mean | 77,64 | 2,58 | 31,78 | −11,63 |
| Rise / fall potential | 566% | 54% | 143% | 31% |
Dividends and buyback program
The company did not pay dividends in 2021. Before the crisis, the company paid dividends on a quarterly basis linked to earnings.. In March 2020, the company announced the suspension of Carnival Corp's dividend payments and share buyback program., to stay within regulatory liquidity requirements.
Other companies in the cruise industry have done the same.. Considering the current crisis situation of the company, investors should not expect resumption of payments in the near future. The average return over a five-year period was 4,96%, and the dividend growth rate is negative due to the decline in 2020.
Dividend per share, in dollars
| Dividend per share | Payout ratio | Dividend yield | Buyback Yield | Total return | |
|---|---|---|---|---|---|
| 2016 | 1,35 | 34% | 2,59% | 6,19% | 8,78% |
| 2017 | 1,60 | 92% | 2,41% | 1,12% | 3,53% |
| 2018 | 1,95 | — | 3,96% | — | 3,96% |
| 2019 | 2 | 26% | 3,93% | — | 3,93% |
| 2020 | 0,50 | 28% | 4,62% | — | 4,62% |
What's the bottom line?
Carnival up-to-date 9 months expectedly showed losses. Significant cost reduction should be noted, which gives a little time to survive the crisis situation. The company continues to increase its debt burden and, Most likely, will continue to do so until the end of this year.
The risk of bankruptcy is lower, than competitors Royal Caribbean and Norwegian Cruise. Despite being underestimated by multipliers, current value investors and investors, dividend oriented, Carnival is unlikely to be interesting due to the high debt load and the risk of bankruptcy.
“Better to buy a good company at a fair price, than mediocre - excellent", as Warren Buffett says. The best option for investors would be to wait for the company to become profitable and then make a decision. It will take years for the company to restore dividend payments and former financial stability, which will allow time to buy in more predictable conditions.
