Cruise stocks tanked on Wednesday after yet another major Wall Street firm warned that weak demand and higher costs could sink industry profits and lead to another demand shock, with Morgan Stanley cautioning that Carnival shares could lose all of their value if the economy falls into a recession.
Shares of Carnival plunged 14% to less than $9 per share on Wednesday after Morgan Stanley warned that the company could face heavy losses amid weakening demand and higher costs.
The investment bank slashed its price target on the stock to $7 per share from $13, one of the lowest forecasts on Wall Street, while also warning that Carnival’s earnings in 2022 and 2023 are likely to take a hit.
Morgan Stanley slashed full-year EBITDA estimates for the company from nearly a $1 billion profit to a $900 million loss, “due to weaker than expected occupancies, weakening pricing, elevated unit costs and higher fuel costs.”
What’s more, the firm warned that in a worst-case scenario, Carnival’s stock could fall to $0 per share and lose all of its value if the economy falls into a recession and the company faces another “demand shock.”
Given Carnival’s high debt levels (over $35 billion), the company’s liquidity and cash pile, which stood at $7.5 billion by the end of the second quarter, could “quickly shrink” if bookings slow or more customers cancel deposits, Morgan Stanley analysts wrote.
Rival cruise line stocks also tanked on the bad news, with the likes of Norwegian Cruise Line and Royal Caribbean each falling by roughly 10% on Wednesday.
Morgan Stanley’s gloomy outlook comes even as cruise lines like Carnival are gearing up for a busy summer season. Carnival sailed its entire fleet in May and expects to operate at 110% capacity during the third quarter, which should provide a boost to earnings, CEO Arnold Donald said last week. Like the rest of the industry, Carnival took a big hit from pandemic lockdowns in 2020 halting cruises for a big chunk of the year, with many major operators taking on large amounts of debt to keep their business afloat. While travel has rebounded, cruise lines have been slower to return to full capacity, given the negative economic impact of high inflation and surging oil prices.
The Covid-19 pandemic, surging inflation and higher fuel prices are all having a “material impact” on Carnival’s business, management said on the earnings call last week. The company now expects to post a net loss for the rest of 2022, though earnings are forecast to improve once cruise operations return to historical levels by next year.
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Carnival’s stock rallied after the company posted strong second quarter earnings results last Friday, with revenue and cruise bookings both rising sharply from earlier in the year. Sales hit $2.4 billion—up nearly 50% from the first quarter, while customer deposits jumped to over $5 billion and occupancy onboard Carnival’s cruise ships rose from 54% to 69%. Despite the positive results, shares fell once more after several firms including Stifel and Wells Fargo both slashed their price targets for the stock in recent days. Carnival’s stock is down nearly 60% this year, compared to the benchmark S&P 500’s roughly 20% decline.