A few months ago it looked like things were going to be smooth sailing for Carnival (CCL) shares in 2021. Thanks to the vaccine’s rollout in the United States, investors offered up shares in the cruise line. That happened even as concerns such as mounting debt and an uncertain recovery timeline cast doubt on its valuation.
Recently, the water has become more turbulent. Shares took a plunge in early July as fears over the Delta variant of COVID-19 began to mount. Carnival’s stock has since begun to recover as the company is still poised to return its entire fleet to service by the end of the year.
But whether or not the Delta variant causes a repeat of last year’s social distancing, there’s another problem: Carnival’s valuation remains too optimistic. For today’s valuation to make sense, the company must return to profitability much sooner than analysts expect.
In short, if “reopening trading” makes a comeback, investors can stay cautious with Carnival stock from here on out. (To see Carnival stock charts on TipRanks)
Will recent variant concerns continue to affect CCL stock recovery?
With the Delta variant becoming a serious problem in the US, investors are cooling off quite a bit on the ‘re-opening’ trade. Other cruise stocks, such as Royal Caribbean (RCL), have experienced major declines in recent weeks. So also other travel games, such as airline stocks.
Are investors on the right track if they start discounting this sector again? Or does the shift in sentiment give those who missed the first “re-opening” of the trading rally a chance to dive into a solid entry point in names like CCL stocks? Many would recommend going with the former.
Yes, Carnival’s reopening plans may not be on hold just yet. However, a recent court ruling indicates that, if necessary, the Centers for Disease Control (CDC) will have no problem reinstating the previous “do not sail” orders. If the Delta variant became a serious problem in the US, cruises could grind to a halt.
Even if the Delta variant doesn’t lead to another round of restrictions, the other factors that were less of a concern to investors earlier this year could once again become top of mind.
Even as concerns about the delta diminish, other risks remain
The latest developments with the pandemic may or may not lead to more challenges for the cruise line. Even assuming the recent concerns are exaggerated, there are other factors limiting the ability of CCL stocks to rise in the coming months.
First, Carnival’s management can speak of growing demand. The flip side of this demand is the significant discounts the company offered passengers to get them back at sea. Reduced prices mean that it is still questionable when Carnival will come out of the red.
In addition, Carnival is still priced as if it will hit the top end of analyst estimates in 2022. Equities could fall, or at least fail to recover further, if results in the coming quarters fall short of expectations.
Even if profitability occurs earlier than expected, it may not translate into a higher price for CCL stock either. Concerns about the company’s high debt and ability to repay it could also weigh on the company. Put it all together, and it could be a while before stocks climb back above $30 a share.
What Analysts Are Saying About CCL Stocks
According to TipRanks, CCL stock has a consensus rating of Hold. Out of 9 analyst ratings, 4 rate it as buy, 2 analyst rate it as hold, and 3 analyst rate it as sell.
As for price targets, the average price target for carnival is $29.57 per share, representing an increase of approximately 27.7% from current prices. Analysts’ price targets range from a low of $18 per share to a high of $39 per share.
Bottom Line: Variant or no variant, it’s anything but ‘Smooth Sailing’ for Carnival Stock
Recent news of Delta variants has once again caused CCL stocks to plummet. Only time will tell if this recent resurgence of the pandemic will cause the CDC to revert to “don’t sail” orders.
But even if it’s still “full steam ahead” for cruise ships from US ports, other factors, such as valuation and debt, can affect performance. In the coming months, few investors are likely to decide to buy the dip in Carnival stock.
Disclosure: Thomas Niel had no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this section should be construed as a solicitation to buy or sell securities.