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How will a $3bn loss affect Carnival's share price?

Carnival's [CCL] share price has dropped almost 80% so far this year. The coronavirus outbreak has decimated the cruise operator’s business, forcing it to cancel trips while losses mount.

These losses are massive, running to several billion pounds each quarter. Last week the firm announced that it would see a near-£3bn loss in the third quarter, putting Carnival’s share price under further pressure.

So, is Carnival's share price worth the risk, or is the operator in for more choppy trading?

 

 

The losses

Carnival has said it will report a £2.9bn loss in the third quarter. The scale of the losses come after the coronavirus has effectively wiped out the travel industry for another quarter. The losses include a $900m impairment change and an adjusted net loss of $1.7bn. This comes on top of the $2.4bn net loss seen in the second quarter of the year.

£2.9billion

Carnival's estimated Q3 loss

  

What's the impact on Carnival's share price?

Carnival's share price sunk 2.5% following the announcement, with the scale of the losses well above analyst predictions. According to MarketWatch, the consensus on FactSet was for a net loss of $1.66bn in the third quarter.

Carnival’s share price also saw a 7% drop at the start of September when its Italian division Costa cancelled South American voyages for November 2020 and April 2021.

 

What else is Carnival doing?

To turn the ship around, Carnival said that it will be raising $1bn in a stock offering later in the year. Given Carnival's share price drop, now wouldn't normally be the best time for the company to raise money by selling its own stock with the risk of further diluting it. These are desperate times, however, with Carnival burning through $770m every month and having only $8bn in cash.

As Robinhood noted, markets reacted “rationally” to the decision:

"Markets reacted rationally... They do that sometimes. Carnival is selling $1B worth of new stock, which represented ~7% of its market value before the announcement. The stock dropped 8% on Tuesday morning after the announcement — that's very close to the percentage Carnival got diluted by. In this case, investors' reaction made total sense."

$770million

Amount Carnival is spending each month

  

What else can Carnival do?

Carnival is saying goodbye to 18 of its less-efficient liners. According to the operator, these accounted for 12% of its capacity in 2019, but only 3% of operating income. Carnival has also paused new ship orders and expects to take delivery of one new liner in 2025. According to Carnival’s CEO Arnold Donald, this will allow the operator to "pay down debt and create increasing value for our shareholders".

 

Market Cap£6.364bn
EPS (TTM)-424.70
Operating Margin (TTM)2.56%
Quarterly Revenue Growth (YoY)-84.7%

Carnival share price vitals, Yahoo Finance, 21 September 2020

 

What's next for Carnival's share price?

On a brighter note, there has been evidence of pent up demand for cruise holidays. Advance bookings for the second half of 2021 are at the higher end compared to previous years, Donald said.

Yet given how much cash the company is burning through, the next few months are unlikely to be plain sailing for Carnival’s share price.

Among the analysts tracking Carnival's share price on the Financial Times, the stock carries an average 1,139.05p price target. Hitting this would see a 20.2% upside on 18 September's close. Of the 8 analysts offering recommendations, Carnival has 6 Hold ratings and 2 Underperform ratings. 

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