This post was written on 10 March 2020. When the post is published, it will be interesting.

The analysis is separated into two parts. The first part assumes Covid-19 never exists and evaluate whether CCL is a preferred stock to invest. The second part looks at whether CCL is tough enough to overcome the impact of Covid-19. The rationale is that Covid-19 is temporary. If CCL is worth investing without Covid-19 and it is tough enough, given the current price, CCL may be a good opportunity.

About CARNIVAL CORP (CCL)

Carnival Corporation & Carnival Plc are among the largest vacation companies in the world with 11 brands: Carnival Cruise Lines, Princess Cruises, Holland America Line, Costa Cruises, P&O Cruises, Cunard Line, The Yachts of Seabourn, Ocean Village, AIDA, Ibero Cruises, and P&O Cruises Australia. These brands operate over 100 ships with approximately 221,000 lower berths. The company also operates Holland America Princess Alaska Tours. Micky Arison has 18.2% of voting control of Carnival Corporation (3/19 proxy). President & CEO: Arnold W. Donald; Chairman: Micky Arison. Incorporated: Republic of Panama.

What if there is no Covid-19?

Basic Statistics

10-year sales data shows that sales is improving with both 5-year and 5-year median growth of 8%.

Not only its sales is improving. The profit margin maintained improved after 2014. Profit margin is not as impressive as its competitor RCL.

The rate of earnings improvement is higher than that of sales which indicates RCL improves on managing costs. But there may be rooms for manipulating the depreciation of cruise ships. Let’s review the depreciation too.

Depreciation expenses generally follow the trend of sales which makes sense to me since the more customers use the ship, the more the ship should be depreciated.

The 5-year median dividend per share is 1.6 and the 10-year median dividend per share is 1.1. Both are lower than its competitor RCL.

Valuation

Usually, I divide cash flow from operating activities by the required rate of return to get the valuation of the stock. Then I will compare Earning Yield and Dividend Yield with Bond Yield to have a feeling on whether the stock is expensive or not.

USD in Billion20192018201720162015
Cash flow from operating activities5.485.555.325.134.55
Shares Outstanding0.69

If the required rate of return is 10, the valuation of CCL will be USD 77.1 \frac{5.32}{0.69*0.1} which is quite close to the price in 2019. If we use the year 2015 figure, the valuation will be USD 65.9 \frac{4.55}{0.21*0.1}. Both 2 figures are higher than the current price of 21.74.

A more detail analysis should also include maintenance capital expenditure (capital expenditures that are necessary for the company to continue operating in its current form) in the cash flow formula since ships needed to be maintained.

To calculate the maintenance capital expenditure, I use Bruce Greenwald’s Method. The method is simple. We calculate the average PP&E needed for each dollar of revenue. Multiply this with the revenue growth and get the PP&E needed to support the growth. Minus this number with capex and get the maintenance capex.

20152016201720182019Median
Gross PP&E45.7947.5250.8752.6255.7850.87
Total Revenue15.7116.3917.5118.8820.8317.51
PP&E/Revenue2.914704012.8993288592.905197032.7870762712.6778684592.899328859
Revenue Growth0.681.121.371.951.245
Capex-2.29-3.06-2.94-3.75-5.43-3.06
Maintenance Capex5.0315436246.1938206747.56829449210.651843496.66966443

The estimated maintenance capex is much higher than the depreciation of 2.1 which may due to high revenue growth expectation. As such, cash flow to the firm is negative. This also can be confirmed in the company cash flow statement that the purchase of PP&E is quite high compared with cash flow from operating activities.

If we use depreciation as maintenance capex, the valuation will become USD 46.6 \frac{5.32-2.1}{0.69*0.1}. Still, it is above the current price. If we want to be harsh, we may use the year 2015 cash flow from operations, this gives USD 35.5.

Using the 5-year median EPS (3.59), the current earnings yield is 16.5% which is high. Using the 5-year median DPS (1.6), the current dividend yield is 7.35% which is good (depends on your preference).

Liabilities and Leverage

Negative working capital may not be a bad thing is the cruise ship industry since the business can generate cash quicker than pay its bill to the supplier. It is quite common for a cruise ship company to have negative working capital.

  • Around half of the current liabilities is deferred income which means prepayment made from selling tickets.
  • The current leverage ratio is around 0.77 (\frac{19.69}{25.37}).

In general, I think the company’s leverage is healthy. But further analysis is needed to estimate the impact of Covid-19.

Can CCL Survive and Recover?

This is really hard to tell since it depends on the development of Covid-19 and how long it will last.

One of the matrix to evaluate bankruptcy risk is Altman Z-Score. It makes use of five ratios, namely, working capital/total assets, retained earnings/ total assets, earnings before interest and tax / total assets, the market value of equity/ total liabilities, and sales/ total assets. This website explains very well on Z-score.

The current z-score of CCL is 1.81, indicating it is in grey zone but close to the distress zone. According to Guru.com, the historical z-score of CCL is as follow:

Dec 2015Dec 2016Dec 2017Dec 2018Dec 2019
z-score2.662.682.962.742.28

It indicates that CCL is consistently safe from distress but materially affected by the current Covid-19 outbreak.

Around half of the current liabilities, 4.7 billion, is deferred income. Under the current situation, if sailings canceled, the company needs to refund. According to the 2019 annual report, the company has around 12.5 billion liquidity (6.58 billion liquidity available in 2020) which is sufficient to cover 4.7 billion deferred income.

Apart from the negative cash flow problem, I am comfortable investing in this stock.

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