In the best interests of long-term shareholders, we are making disciplined decisions to optimize our short-term performance while leaving ourselves in the best position to take full advantage of the global growth in travel and tourism over the long term.

The above quote comes from Carnival Society‘s (NYSE: CCL)(NYSE: CUK) Annual report 2019, published February 26, 2020. It mentions the “short term”, but the company did not know what was coming. On March 13, Carnival suspended its North American cruises due to the global COVID-19 pandemic. They’ve been on hold ever since as the company burns hundreds of millions of dollars in cash every month.

Carnival shares have been decimated and many investors are understandably wondering if they should buy before they go up. This question assumes that it will come back up, and it is not a given.

Carnival vs S&P 500 Performance, data by YCharts.

A very good scenario

In order for Carnival’s stock to return to where it was, the company would need to to be what it used to be. So let’s quickly take a look at a best-case scenario, even if it is unrealistic. Carnival cannot do business at the moment because the coronavirus has docked its fleet. If a cure is soon found, the economy returns to normal and people “expect it is high time to go to sea” (as Herman Melville put it), so maybe business in 2021 would look like to 2019.

But Carnival, the company, won’t immediately be what it used to be. He had $ 11.5 billion in debt at the end of February. Since then, it has raised $ 4 billion in secured notes and withdrawn $ 3 billion from its credit facility. This will have to be refunded. The company generated $ 5.5 billion in operating cash in fiscal 2019 and returned $ 2 billion to shareholders. Dividends and redemptions are already suspended. A fully operational Carnival could theoretically turn around its balance sheet within five years by continuing this pause in shareholder returns.

These two problems solved, one problem remains: dilution. In April, Carnival raised $ 575 million by selling 71.9 million new shares. And he raised $ 1.95 billion through convertible notes, which could increase the number of shares by 195 million in 2023. As a prospect, there were about 528 million common shares outstanding before these. movements.

By adding more shares, each Carnival share represents a smaller slice of the business. All other things being equal, this means that Carnival should grow its business. beyond what it was in 2019 for the price per share to return to previous highs.

This whole happy scenario could take a decade.

Image source: Getty Images.

Bad (but real) possibilities

Rather than the scenario just described, it is more likely that Carnival cruises will resume navigation with limited capacity. Carnival is already considering the limited capacity option, according to Business Insider. But he could also be mandated. Some lawmakers are already committing airlines to keep the middle seats open to maintain physical distance. Similar distancing restrictions could be placed on cruise ships.

Beyond these potential restrictions, the occupancy rate of cruise ships could remain low due to lower consumer demand. Fears and weak economic conditions could lower bookings. Whatever the reason, a Carnival cruise with limited capacity will not generate the same cash flow as a full ship. This would further delay the target date of return to normal.

There are also bad possibilities that are harder to quantify, including future claims. Consider that among canceled cruises, only 38% of customers have requested refunds so far, with most of the rest choosing credits for a future cruise. If Carnival postponed cruises further, for example due to a new coronavirus outbreak, it could trigger a wave of refund requests – a potentially crippling drain on cash.

Image source: Getty Images.

Should we buy?

I know Carnival stock is on the radar of many new investors. In an interview on CNBC Crazy money, The CEO of investment app Robinhood identified Carnival as one of the 10 most bought stocks on the platform in March. I suspect people are flocking to Carnival stocks just because they are down. This is not a good reason to buy a stock. It’s more like gambling.

Investing is often compared to gambling, but overall I couldn’t disagree more with the comparison. The odds are astronomically stacked against the player. On the other hand, a person rarely has to worry about losing everything when invest in stocks, especially when buying from leading companies.

However, in Carnival’s case, if he cannot resume cruising in 2020, the risk of bankruptcy increases dramatically. Therefore, you should at least recognize that the losing outcome is on the table. Personally, I held shares during the crash, but I don’t recommend putting new capital to work in this stock. At most, I would allocate a small position in a balanced portfolio, recognizing that this is a bet. There are much better options for new investors to build their portfolios.