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Jul 13, 2020

Carnival could actually benefit from the pandemic, Stifel says

Cruise lines can't stay in a zero revenue environment forever: Analyst

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The COVID-19 pandemic that pushed the cruise industry into a costly state of limbo may prove to be a long-term positive for Carnival Corp., Stifel said.

“No, we aren’t crazy or suffering from some sort of home lockdown psychological disorder,” analyst Steve Wieczynski told investors in a note.

While the coronavirus will hurt industry demand well into fiscal year 2021, it holds the potential to accelerate change at Carnival in areas that have long weighed on shares, including cost structure and fleet age, Wieczynski said. Because of the pandemic, Carnival was put in position to address these areas head on, he said.

Carnival posted a US$4.37-billion loss for the quarter ended May 31 as operations were paused for the majority of the period. Shares of the Miami-based company in April plunged to the lowest level since 1993, and while shares later pared some of those losses, they are still down 69 per cent this year. Wieczynski is bullish on the stock, unlike the majority of analysts tracked by Bloomberg, who remain on the sidelines.

Wieczynski said that several factors have combined to create an overhang on Carnival’s valuation: concerns related to the cruise operator’s inefficient cost structure, limitations caused by an older fleet and potential challenges tied to near-term supply growth.

Carnival has reduced its annualized operating costs by more US$7 billion and has accelerated the removal of older hardware, with 13 ships — or about nine per cent of capacity — set to exit the fleet by the end of fiscal 2020. In addition, Carnival has reduced the number of ships expected to be delivered before the end of fiscal 2021 to five from nine.

“We expect Carnival to emerge a leaner and more efficient entity,” which should enhance its ability to generate consistent earnings per share and free cash flow growth for years to come, Wieczynski said.

However, the analyst stresses that he’s not saying he’d take the current situation over the pre-shutdown status quo. But the improvements borne out of the shutdown strengthen his conviction in a buy rating over the longer term.

“Out of adversity comes opportunity,” Wieczynski said, quoting U.S. founding father Benjamin Franklin.