Carnival Corporation's (NYSE:CCL) Cash Burn Might Resolve as Early as Q3

After a rather volatile 2021, Carnival Corporation(NYSE: CCL) stock trended down, pressured by the slower than anticipated recovery.

Although the company has been missing earnings estimates, revenue is gradually climbing back up as the company is a few weeks away from operating at full capacity.

Check out our latest analysis for Carnival Corporation

First-quarter 2022 results:

• US$1.66 loss per share (up from US$1.80 loss in 1Q 2021).
• Revenue: US$1.62b (up US$1.60b from 1Q 2021).
• Net loss: US$1.89b (loss narrowed 4.2% from 1Q 2021).

Revenue missed analyst estimates by 28%. Earnings per share (EPS) exceeded analyst estimates by 45%.

Over the next year, revenue is forecast to grow 364%, compared to a 99% growth forecast for the industry in the US. Obviously, this is due to the recovery after 2020.

New Concerns Replace Omicron

After running into substantial issues in Q4 due to the Omicron variant, institutions are now concerned about potential new issues, including rapidly rising fuel costs and higher capital spending, which can increase debt and interest expenses – hardly an ideal scenario in the rising interest rate environment.

Thus, Argus lowered its rating to Hold from Buy, while Stifel lowered the price target to US$30 from US$33. Meanwhile, Jeffries kept a Hold rating in place as their analyst David Katz expects rising input costs to result in underwhelming reactions from investors.

When Might Carnival Corporation Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current cash burn rate.

In the last year, the company had a cash burn of US$7.7b, and it closed the year with around US$9.1b in cash. Thus, it has roughly 14 months of cash runway. Yet, currently, the analyst estimates the cash flow breakeven is around 18 months away, so the company might not need to raise additional cash - an optimistic thought at the start of an interest rate hike cycle.

The image below shows how its cash balance has been changing over the last few years.

How Easily Can Carnival Corporation Raise Cash?

Carnival Corporation seems to be in an ok position in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalization, we understand how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalization of US$21b, Carnival Corporation's US$7.7b in cash burn equates to about 37% of its market value. That's a fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution. However, we have to note that the company hasn't been diluting in the last year. They preferred to raise cash through debt and not by selling their shares.

Conclusion

Cruise stocks seem to be sailing from one storm into another - from the pandemic to rising fuel costs, rising interest rates, and heightened geopolitical turmoils. This all contributes to institutions being relatively modest in ratings and price targets.

Yet, with the majority of Carnival's capacity restored and full operations expected by May, their plan to post a profit for Q3 is a possibility. Thus, we're not concerned about the company's cash burn, although we think shareholders should watch how it develops.

Readers need to be cognizant of the risks that can affect the company's operations. We've picked out 2 warning signs for Carnival Corporation that investors should know when investing in the stock.

If you prefer to check out another company with better fundamentals, do not miss this free list of interesting companies with a HIGH return on equity and low debt or this list of stocks that are all forecast to grow.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.