Carnival (LSE:CCL) is the largest travel leisure company in the world. When the coronavirus hit in February 2020, the stock saw an 80% decrease in price in less than a month. With alarm bells ringing in the minds of travellers across the world, a cruise ship company was the last thing anybody was thinking to invest in, but think again: Carnival shares are already up 160% since the recent market crash.
Although the company is operating at a current loss, I have to ask myself whether current market conditions will last forever. When the current pandemic eases up, people will undoubtedly want to travel abroad, with a large sum of people choosing cruise ships as their choice of transportation.
Beware of the new public offering
With Carnival recently commencing an underwritten public offering of $1 billion shares of common stock, I’m not going to buy shares before a significant dilution takes place when new shares are issued. Share dilutions occur when the number of shares available increases due to new public offerings, usually significantly decreasing the EPS (earnings per share) along with the share price.
The rebound potential is huge
However, as soon as holidays abroad becomes the renewed norm, I bet that travel companies will see a huge rebound in earnings power and an increased share price to match. The earnings of Carnival are currently at an all-time low, recording a gross loss of US$684 million for the current trailing 12 months, contrasting to a steady increase from US$7 billion to US$7.9 billion of gross annual profit from 2017-2019.
As vaccines begin to take effect on society at large, I believe it will become apparent that these negative earnings were temporary. I have to question whether Carnival can survive financially until the rebound of the travel industries and the recurrence of cruising as a mainstream form of travel and vacation. With the share price currently rising and the company reporting a loss, it’s exciting to envisage what Carnival shares will do once the company begins to report a profit again. It’s safe to say many other investors have had the same idea already, driving the share price up while waiting for the profit potential of the company to return.
The Warren Buffett way
Benjamin Graham and Warren Buffett, founding father and master disciple of value investing respectively, would attest to the power of buying great companies when they are at their lows. No one can argue that Carnival is a leading world conglomerate that is unmatched in its field of expertise. The inherent risk here is whether the company is strong enough to survive until the turnaround occurs.
Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.